Nolo's Small Business Legal Blog

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.

Here's the first strategy from my save your business list. It's a fairly obvious one, but not following it has cost many a small business owner their shirt over the last six months:

1) You must react quickly to bad news.

If an economic downturn, bad industry news, or the illness of a key employee or owner threatens the viability of your company, you need to make a quick decision: Will you try to fix the problem (for example, in a downturn, you might cut costs sharply to try to stay afloat), change the direction of your business, try to sell your business, or simply close down? Failing to act quickly can bring down a business that could have otherwise have survived.

Here's an example: A friend of mine worked at a company that lost half of its service business by January 2009. But they kept hoping things would turn around and didn't want to lose any employees, so they kept a full staff until April, when they finally made some gradual layoffs. Then in May, when they started having trouble paying bills as they came due, they reduced the work week to from 40 hours to 30 hours. In June, they laid off a few more employees each week, until just a few people were left in the office. The first week of July, fearing the worst, two key employees left for new jobs, and the company imploded. Lesson to be learned: The company should have made deep cuts in January, probably laying off half of its workforce then. If it had done that, it would have had a good chance of keeping the rest of its employees busy at 40 hours per week and might have been able to hold on to its key employees. Of course, hindsight is 20/20.

My new book (okay, the one I co-authored with Nolo's Ralph Warner), Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down & Move On, has just arrived from the printer! To celebrate its publication, over the next ten posts I'll introduce the book's 10 core strategies to saving a troubled business.

Many entrepreneurs and foodies dream about starting a new restaurant, sure that they can beat the odds, even though statistics say that the restaurant failure rate is among the highest of all small businesses. Think you can beat the odds, even in an economic downturn? Here are some good tips on starting a restaurant I just stumbled on, complements of Entrepreneur magazine's Sara Wilson.