Will My Business Bankruptcy Affect My Personal Finances?Sunday, August 15th, 2021, 9:01 am
Business bankruptcy, just like personal bankruptcy, is a tool that can help you get a handle on your business expenses and debt. It can save your business if you use it correctly. However, many business owners are hesitant to do so because they are concerned that it will affect their personal finances. Does it? That depends on a few factors.
The Type of Business You Own Determines How Bankruptcy Affects You
There are a number of different business types, including sole proprietorship, limited liability company (LLC), corporation, and more. If you’re operating a sole proprietorship, you are essentially the business. This means there is little to no level of protection between your personal assets and your business. Declaring bankruptcy is going to have an impact on your finances and assets.
What if you own a LLC or corporation? If that’s the case, your personal assets should be protected. As the name suggests, a LLC is designed to limit your personal liability. You can create a single-member LLC easily and doing so protects your personal assets in several ways. Corporations take a little more work but can also protect your personal assets. Note, however, that there are a few exceptions that could result in your personal finances being impacted by a business bankruptcy. You’ll want to talk to a lawyer and a CPA to learn more.
The Piercing of the Corporate Veil
These exceptions are referred to as piercing the corporate veil. Typically, this is not something you will have to worry about unless your LLC or corporation engaged in some type of illegal, reckless, negligent, or fraudulent business practices. If the bankruptcy court does determine that your business has done so, you may lose the liability protection that the LLC or corporation provides.
Did You Cosign or Otherwise Personally Guarantee Business Loans?
If you have personally guaranteed business loans by cosigning or putting up personal collateral, your business creditors do have a legal channel into your personal finances. This is why it’s very important to understand the risks you’re taking when you personally guarantee a business loan. Even if you fully believe your business is going to thrive, cosigning or putting up personal assets as collateral is a risk.
Want to make certain your personal assets are protected? Need help filing for business bankruptcy? Reach out to Michael F. Kanzer & Associates today.