Your business takes on a lot of debt in order to get rolling. The idea, of course, is that you’ll have enough success to eventually pay that debt back. But you need money to get started.
What happens if things don’t go exactly according to plan? Say that you take out $100,000 in debt, but then the business goes under. By the following year, you don’t even have a company to bring in money, so you’re certainly not able to pay that money back. Are you personally going to be responsible for that $100,000? How much of a problem is this going to be for you?
The type of business structure matters
You may or may not be liable for that debt, and a lot of it just depends on what type of business structure you decided to use. That’s why it’s very important to consider this carefully when you get started.
For instance, maybe you’re just running the business by yourself. Maybe you haven’t declared it as a business entity at all, or maybe it’s just a sole proprietorship. This is essentially seen as an extension of yourself, so you are liable for any debt that you take on. There may be other ways to eliminate that debt, such as declaring bankruptcy, but know that the creditors can contact you personally to ask for repayment of the loans that you took out.
On the other hand, maybe you started a Limited Liability Corporation (LLC). If you did that, as the name suggests, it limits your liability for debts that the business holds. You are typically not personally responsible for any of the loans that were given to your business. They were not given to you directly. If the business goes under, you may have to liquidate assets and pay off a portion of the loan, but you don’t have to pay out of your personal finances or sell your personal assets.
This can be very important, especially for business owners who are worried about taking any risks because of the potential ramifications in their personal life. If you’re starting a business, make sure you consider this carefully and determine what structure is best for you.