Bankruptcy in a small business is a big deal
- Michelle Wood: SWCD
- October 18, 2009
- 746
The owners of these businesses are either sole proprietors, single or multiple members of limited liability companies (LLC) or small corporations.
In any event, the common thread is that they are concerned about personal liability for outstanding debts and how to protect their personal assets.
I will remind you that I am not providing legal advice and, of course, you should talk with an attorney to determine your exact exposure.
I will make a very brief attempt to explain different exposures you should be aware of. There are three types of exposures that all businesses face. They are:
• Exposure to customers - this would be liability for workmanship or performance of a contract
• Liability to general creditors - this would be for trade accounts payable to vendors
• Liability for debts - this would be for loans made to the business.
Business bankruptcy would leave customers who made deposits and those with unfinished projects filing a claim against you for the amount of the unfinished work or the deposit.
Generally speaking, the LLC and corporate form of entity would provide protection of personal assets.
Vendors generally make you sign a personal guarantee for purchases and so, regardless of business type, you may be liable to unpaid vendors. Check your vendor contract.
Banks almost always require that you sign a personal guarantee when borrowing for a business loan to any small business. They would be foolish if they didn’t. That means that all your personal assets are available to the banks in a bankruptcy.
Generally, business owners are so enthusiastic about the start of their business that bankruptcy is the last thing on their minds and hence they sign away their “protection” of personal assets.
Keep in mind that what I have provided is a very brief explanation and you really do need to seek legal counsel for specific help with your liability exposures.
I hope this has helped some people who are in severe need of assistance.
Bill Weber, CPA, has been advising businesses for more than 30 years. He has served in leadership with Crown Financial Ministries and is a church co-coordinator for Financial Peace University.
The opinions expressed in this column are mine, alone. The Bargain Hunter, their editors and advertisers do not condone, endorse or share my opinion. They are way too smart for that.