Am I Personally Liable For Business Debts?

Personal debt or business debt, if not managed well, can prove to be a nightmare, and we all agree to this, don't we? But are you personally liable for business debts? This question pops in every business owner's mind who is in debt or is about to take a loan. So, understanding the classification of the debt and its implications is extremely important, be it for individuals or business owners. Whether you are liable for business debts or not depends solely on the nature of the loan and the structure of the company. Let’s uncover all the information in this detailed article.

 

The nature of the Debt and the Business Formation

You must be aware that there are various types of loans available for different purposes, for example, home loan, business loan, property loan, medical loan, etc. and how it will be recovered depends on the type. Even a credit card is a type of debt that you need to repay timely.

The second important factor is the business formation and its structure. The purpose of the business structure is to formalize and protect the shareholders from personal liability. For instance, if you have a corporation, an LLC, or any other hybrid entity, then you aren’t personally responsible for paying the business debt, as long as it’s not for your own use. That’s why, reason and purpose of the loan have to be disclosed beforehand, with appropriate channels. Experts advise being aware of the implications of the loans, and that's when taking legal opinion is a good thing to do.

On the other hand, sole proprietors are usually liable for the business debts because of the structure of the company. Being the sole owner, financial dealings are done under your name, unlike other forms of business. If you haven’t incorporated or set up some sort of business entity, you and your business are equally liable for the debts incurred. It is because the business does not have sufficient assets, funds and therefore creditors may demand money from you or sue you and try to collect the debt by taking control of your property, car, or any other personal property. Experts often recommend forming a legal business entity for better transparency and business growth.

 

What are the circumstances where you are liable to pay for your business debts?

Following are the scenarios where you will be responsible for your business borrowing:

• You have signed a personal guarantee: 
  Personal guarantees must be taken very seriously because a business owner has to declare proof of assets before entering into a personal guarantee, and hence, a failed business can prove to be costly for you.
• You have taken out a business loan to buy real estate.
• You have signed a lease for an office space or retail space.
• You have purchased (on credit) some expensive equipment.
• Wrongful Doings:
  If you have intentionally induced in wrongful doings intending to defraud, it is deemed as a breach of trust, ignorance of due procedure. It's a failure on your part to understand the rules before taking the debt. There are many nitty gritties.
• Fraudulent Trading: If you have engaged in fraudulent trading of goods then in that case the business may be held personally liable.
• Transactions at undervalue or overvalue: You might be liable for your business debt because of the lack of transparency in your business dealings. This is subject to investigation by the authorities.
• Others: There are many other reasons where you are liable to business debt, subject to the case, and can be judged only after careful assessment. 

 

How Can You Get Rid of Personal Liability for Business Debt?

It’s common and understandable for someone to be liable for a business debt, or who has particularly signed a personal guarantee. However, it can be eliminated partially or in full if you have the right guide beside you. Or you can take the help of a debt attorney in filing individual bankruptcy according to your situation. These cases are individually assessed because the purpose of the loan is usually different for different borrowers. If you have a legal business structure, then the attorney would be able to talk you through the implications, exceptions, and your rights. He will help you meet your obligations as a director and ease out any personal liability for the debts by taking relevant measures that best suit the business case.