70% of small businesses survive at least two years, but only half of small businesses survive their first five years.
U.S. business debt has climbed to an alarming nine trillion dollars.
Maybe you're already a business owner or you are thinking about starting your own business. Either way, there is no doubt you have wondered what might happen if things go south. You have probably wondered if debts owed by a business are a potential liability for the business owner. The answer is really that it depends.
Protecting your personal assets is one of the most important parts of being a savvy business owner. There are many common mistakes to avoid to keep your personal assets off the line.
In this article, we will discuss the scenarios that might make a business owner personally liable for the business' debts. Plus we'll give some tips for business owners in this position.
First, What Kind of Business?
There are three common business formats that each provide different levels of exposure for the business owner.
If your business is a sole proprietorship, meaning you are operating as a "DBA" or contractor, you and your business are the same entity. This means you are personally liable for any money owed by your business and your personal assets are on the line.
Similarly, with partnerships, each partner is personally liable for any debt the business incurs. In partnerships, each partner is 100% liable for the entirety of the business' debt and not just a fair share.
Corporations and LLCs
With corporations and LLCs the business entity is a separate entity from the person who founded the business. This should mean that the business owner is protected from personal liability for the business' debt.
Unfortunately, even if your business is organized as a corporation or LLC there are several common pitfalls that can create personal liability for the business owner.
There are several common mistakes that business owners make, usually when securing financing for their business, that expose their personal assets.
In order for small LLCs and corporations to secure financing, financial institutions often require the business owner to promise to repay any debt with their own money or assets. This is because financial institutions know that corporations and LLCs will not hold the business owner personally liable and the financial institutions need collateral.
Below are the most common ways corporation and LLC owners become personally liable for the business' debt.
- Signing a personal guarantee
- Using their home or personal property as collateral
- Funding the business with personal credit lines
- Signing loans in their own name
How to Protect Your Personal Assets
In addition to avoiding the common mistakes discussed above, protecting your personal assets means being informed. One of the easiest ways to stay on top of your financial health is to check your credit score.
It is also wise to make sure you are filing your taxes right.
If mistakes are made and your business goes under, you can still learn how to get out of debt. It's not too late to protect your personal assets from liability arising from your business debts.
Lastly, check out some awesome business tips for 2019.