Can I Be Held Personally Liable for Business Debts?

Businessman pointing at document with chart during discussion with colleagueIf your business starts to get into financial trouble, it’s natural to start asking questions about whether or not you can be personally liable for business debts. The answer to that question largely depends on the type of business you are running.

Sole Proprietorships and Partnerships

If you own a business as a sole proprietor or with one or more partners, you and the partners are 100 percent liable for your business debts. That means that if your business goes under and you have unpaid debt, creditors can and probably will go after your personal assets to repay the debt.

Also, if you are in a partnership, then you and the partners are each 100 percent liable. Unfortunately, that means that if your partners are broke and have no assets, the creditors may go after you for the entire debt and not just your ‘share’.

L.L.C. and Corporations

Corporations and L.L.C.’s offer much more protection from personal liability. Since you and the business are technically separate entities, creditors usually cannot pursue you personally for the business debts.

Becoming Personal Liable

Even in an L.L.C. or corporation, it is possible for small business owners to become personally liable for some or even all of their business debt. There are a variety of situations where you may create personal liability, including:

  • Signing a personal guarantee
  • Offering personal collateral
  • Signing contracts in your own name
  • Using personal accounts and credit cards in business
  • Fraud or poor recordkeeping

What to Do If You’re Personally Liable for Business Debts You Can’t Pay

If you think that you could be held personally liable for business debts, then you should start looking for solutions. It’s best to act before you are sued by creditors for unpaid debts.

You can either pay the debts in full, negotiate a settlement with the creditor, or file for Chapter 7 bankruptcy. Filing bankruptcy is often the best solution, because it allows you to wipe out most, if not all, liability for both business and personal debts.



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