How Declaring Business Bankruptcy Affects Owners

One of the major reasons business owners take action to separate their business legally from their personal finances is to ensure that one is not affected by the financial issues of the other. That being said, there are still some ways that a bankruptcy can affect an individual's personal finances.

Debt Liability in an LLC

Debt liability in an LLC depends on the individual's standing within the company. General partners in a liability may be responsible for a company's debts on a personal level, whereas limited partners will usually be protected.

Other elements may also play a factor, such as arrangements made to guarantee a debt. As an example, a limited partner might guarantee a business loan; in that event, the fact that they are a limited partner will not protect them from that particular debt.

Corporations and Bankruptcy

In most situations, individual owners are protected from a corporation's bankruptcy proceedings. But like an LLC, if the individual owner had personally guaranteed any of the debts in question, the individual owner may become personally responsible for that debt. Loans that have been cosigned by owners in their personal name will also fall under this category.

Bankruptcy in a Partnership

In a partnership, the bankruptcy will first affect the assets of the partnership itself. Once the partnership has been liquidated, partners may become liable for any still existing debts if they were considered to be personally liable for them.

Thus, different partners may incur different amounts of liability during the bankruptcy, depending on the debts that they themselves either cosigned or guaranteed.

Issues With a Sole Proprietorship

The above assumes that the business is a standalone entity. Some business owners have their businesses registered as a sole proprietorship instead. Though this is sensible for some, a sole proprietorship is, in many ways, simply considered self-employed income; it does not afford the same levels of protection that having a separate business would. Thus, business assets and debts will usually be treated as personal assets and debts during a bankruptcy.

Business lawyers Chester County can advise business owners on the appropriate actions to take should their financial situation need to undergo any modifications. Bankruptcy, debt consolidation, debt settlements and other issues can all interact with a business in unanticipated ways depending on the structure of both the business and the debt.