Aug 03, 2009

Minimize Your Personal Liability for Your Debts

Here's the third big-picture strategy from my save your business list:

3. Minimize your personal liability for your business debts.

If you're business is struggling, you should know what's at stake. If you're a sole proprietor or a general partner in a partnership, it's simple: you are personally liable for all debts of your business. That means a creditor can sue you and come after your personal bank account, your house, and your personal property.

If you are a shareholder of a corporation or member of an LLC, theoretically your personal property is protected from business creditors, but there are a number of ways that you can give up this liability protection--mainly by not keeping adequate separation between you and your business. For instance, if you signed a business contract in your name rather than as a representative of the business, or if you signed a personal guarantee, you're personally liable for paying back that debt if the business doesn't. I recently posted an article on Nolo's website that gives further details on when you're personally liable for your business's debts.

If you are currently running a sole proprietorship or partnership and you believe your business is viable in the long term, quickly forming an LLC or corporation will protect your personal assets, such as your house or your car, from being taken to pay off new business debts. If you are able to pay off to pay off your old debts--the ones that you incurred while you were a sole proprietor or partner--and you convert to an LLC or corporation, you'll be protected from personal liability for most new debts. Just keep in mind that forming an LLC or corporation won't allow you to escape your personal liability for current business debts.