Depending on the structure of your business, the associated hazards to your personal assets can vary substantially. If you are a sole proprietor or partner, creditors will have a greater chance of seizing your personal assets compared to if you are an LLC or corporation. However, the situation is anything but straightforward. Although an LLC provides greater protection than a sole proprietorship, it does not offer the same level of protection for all personal assets as a corporation. In addition, regardless of the business structure, a small business owner is frequently required to execute a personal guarantee:
• To the financial institutions for a credit line
• To the proprietor for rent on the commercial property • To suppliers for materials
These personal guarantees subject all personal assets to liens and liquidation, as if they were collateral.
A business insolvency will have no effect on a business owner's personal responsibility for payroll and certain taxes, for example. Prior to filing, consultation with a qualified bankruptcy attorney and a business accountant can accurately determine the personal asset protection options available to both the small business proprietor and the larger corporation. You may be personally affected by the filing, but the presence of these advisors can significantly reduce the degree of adversity.
The manner in which a bankruptcy effects an individual's personal assets is, to a large extent, established during the formation of the business, as is the personal liability. Whether the business is regarded as a single entity or as a separate entity during its formation determines a significant portion of the personal risk component. Sadly, many people start businesses without contemplating the risks associated with a possible bankruptcy. More than half of small enterprises fail in their first year, despite the fact that no one intentionally declares bankruptcy.
Even a limited liability company or corporation may not be exempt from being sued personally. If Chapter 11 reorganization is not possible, the automatic stay provisions of the Federal Bankruptcy Law may extend to foreclosures and personal legal proceedings.
If, as an individual, you borrowed money and invested it in a business at its inception and then converted the business to an LLC or corporation, you are still personally liable for that money. It is a common misunderstanding that, once a sole proprietor incorporates, all personal obligations are absorbed by the business. Actually, nothing could be further from the truth.
Before commencing a business, it is advisable to consult with a business attorney who provides a comprehensive range of services, as every business carries inherent risks. ""Experienced professionals can help mitigate these risks at the outset and shield an individual's future liabilities.""
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