Can I personally be liable for a business loan?

Can I personally be liable for a business loan? Yes, there are several ways you can be personally liable for a business loan. If you are the owner of a sole proprietorship or partner in a general partnership you are personally responsible for all loans your business takes out. If you personally guarantee a business loan, it means that you are personally liable as well.

Some people get business loans without thinking about how it will affect their personal credit. If your business is structured as either a sole proprietorship or general partnership that loan is not just going on your business but your personal credit. If your business defaults you will have to pay the loan or declare bankruptcy. It is a serious commitment and whether you personally sign the paper work or agree to guarantee the loan you do.

It is much better to structure your business as a limited liability cooperation or use some collateral or investment property rather than your personal guarantee on your business loans. Either of these ways will help prevent you from being personally liable on your businesses loans.

Some banks will require you to personally guarantee your businesses loans if your business is too young or has an insufficient credit history to be responsible for the debt. You should avoid personally guaranteeing your businesses loans if at all possible. Some banks will accept real estate or other collateral as a guarantee on the loan instead.

If your business is structured as a sole proprietorship than you and your business are the same in the eyes of the law. This means you are personally responsible for all loans your business takes out. If the business can't pay the loan, than your personal assets including bank accounts and even your house can be used to pay it off. This would have to go through court and the creditor would have to prove the debt and your responsibility for it. The court would then decide which of your assets the creditor could take to pay for the debt.

The scarier structure for a business is a general partnership because each partner can take out loans without the other partner's permission and each partner is responsible for the whole amount the business owes not just their share of the business. So your partner could take out a loan, you know nothing about, and you would be responsible to pay it back, should the business and your partner who took out the loan, default. This combination could get very serious fast.

The IRS holds all business owners personally liable for unpaid payroll taxes regardless of the business structure. The government has made it so even an LLC owner can't get out of the responsibility for this debt and also has made it so even bankruptcy won't save you. Unpaid payroll taxes are a very serious debt to owe.

For some the answer could be filing personal bankruptcy, with a chapter 7 bankruptcy the bank takes your personal assets to pay off the debt. This is only to your advantage if your personal assets are significantly less than the debt owed. Your personal assets would be sold to pay off what it can and usually the rest would be discharged by the courts.

With a Chapter 13 bankruptcy you would be given a monthly payment by the court and a time frame that you are "in" bankruptcy making payments toward the debt. The debt amount is usually considered with debt secured by an asset getting 100% and unsecured debt getting a lower percentage paid.

You can be held personally responsible for business debt so make sure you are going into debt you can pay and the safest form of a business structure for personal liability is a LLC.

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Categories: Loans,

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