17 Sep Are Your Personal Assets at Risk for Business Debt?

When we meet with small business owners who are experiencing financial difficulty, a major concern they face is whether creditors will be able to come after their personal assets.  The answer is — it depends.

While a number of things come into play when trying to tell whether an owner’s personal assets are at issue, the three big things business owners need to keep in mind are: (1) what is the structure of their business; (2) who really owes the money; and (3) what debts did the owners personally guarantee?

How Business Structures Can Limit Your Personal Liability

Most small businesses are structured either as sole proprietorships or they have a legal structure like a corporation or limited liability company.  How you have set up your company can make all the difference between whether or not you face personal liability for a business’s debt.

 Sole Proprietorships

A “sole proprietorship” is a company that from a legal point of view is indistinguishable from you as a person.  It may be a “dba” that is operating with a name other than yours – say “Midtown Florist” – but legally it is the same as you.  The business’s assets are the same as your assets.  When sole proprietors file bankruptcy, the business does not file separately; its assets and liabilities are included with the owner’s.

In this situation, if your business has a debt, that debt is yours.  Because your personal assets are at risk, your business creditors might pursue your personal assets to satisfy any unpaid business debts.

Limited Liability Companies and Corporations

On the other hand, if you have created a limited liability company or a corporation, the debts the business incurs are in most cases not your personal responsibility.  Because limited liability companies (commonly called LLCs) and corporations are separate legal entities from you personally, they can acquire their own debts.  If you are member of an LLC or a shareholder in a corporation, you are not generally liable for the debts the business has incurred.  However, there are some situations where corporate shareholders or LLC members can be held personally liable for business debts that are beyond the scope of this article.   If you are a North Carolina business owner concerned about whether you might face personal liability for your business’s debt, you should consider contacting us or another North Carolina attorney to discuss your potential liability.

Who Really Owes the Debt?

Just because you have incorporated your business does not mean that you are automatically in the clear.  It is not uncommon for an owner who thinks that a contract is in her business’s name to review the contracts and be surprised to learn that the debts are really in her personal name.   A business owner facing financial difficulty should review her agreements carefully and make sure that she knows which debts that she considers to be “business debts” are really business debts and not personal debts incurred for things that are being used by the business.  For example, the loan for a truck that a construction company has could be in the owner’s name and not the company’s.  We often see business owners who assume that just because the business is paying certain debts, the business is responsible for those debts.  Sometimes that is not the case, and a review of bills and contracts can avoid unwanted surprises.

Has the Owner Guaranteed the Debt?

As we said, as a general rule small business owners whose businesses are corporations or LLCs are not personally responsible for business debts.   However, one major exception is when the owner has personally guaranteed the debt.   A personal guarantee is an agreement that makes one person responsible for another person or company’s debts or obligations.  It is not at all uncommon for owners to personally guarantee a corporation’s lease obligation or credit line.  But sometimes owners may not even realize that they have signed guarantees.  For example,  corporate credit card obligations usually contain personal guarantees.  A personal guarantee can put an owner’s assets at risk for a company’s debts.  A business owner facing financial difficulty needs to do is to closely examine debts to find those that the owner has personally guaranteed that put the owner’s assets at risk.

About the Law Office of James C. White

We represent individuals and businesses in Durham, Wake, Orange and surrounding counties in North Carolina Chapter 7, Chapter 11 and Chapter 13 Bankruptcies.  We provide individualized service and attention to each of our clients, looking  at their financial situation to see whether bankruptcy could help save their home or offer a fresh start.   You can contact us to schedule a free consultation to talk through bankruptcy issues by calling us at 919-313-4636.