Business Debts: Do I Have To Pay Them?

14 Oct Business Debts: Do I Have To Pay Them?

Do you have to pay the debts of your business if it closes? It depends on two factors: the form of the enterprise and whether or not you guaranteed the debts.

There are several normal forms of businesses: Sole Proprietorships, Corporations, Partnerships and Limited Liability Companies. Corporations and Limited Liability Companies are separate entities, distinct from their owners. Sole Proprietorships and Partnerships are not: the assets and debts belong to the proprietor or to the partners.

So, if you have a Corporation or an LLC, you are not personally liable for any of the debts unless you signed a personal guarantee. (The one notable exception to this rule is that you could still be responsible for payroll taxes.)

If, on the other hand, you own a Sole Proprietorship or are in a partnership, you are personally liable for all of the debts. Thus, by filing bankruptcy you can eliminate or reduce those debts.

To discharge the obligations of a separate business, such as a corporation or LLC, that entity would have to file the bankruptcy. (Of course if the business simply dissolves, there’s nothing left to sue so the debts effectively go away).

This is one of several good reasons to incorporate a business. it allows you to keep the debts separated. You won’t have to pay them if the business fails. Of course, you won’t get the benefit of ownership of the business assets either; but that is often less of benefit than the burden of the debts.

So, if your sole proprietorship or partnership is failing, consider filing for bankruptcy. But don’t do anything to affect the assets or the debts of the enterprise unless you first speak with a competent bankruptcy attorney. She can steer you through the process to maximize what assets you can keep and what debts will go away (or be reduced).

image credit: Tommy Ironic
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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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