Are Owners of a Partnership Personally Liable for Business Debts?

Business owners are wondering if personal assets like their house, savings and personal possessions are at risk if their enterprise goes into debt. Creditors have been known to raid bank accounts, garnish wages and foreclose mortgages. If your enterprise is classified as a sole proprietorship, it is important to note that you’ll be personally liable for every penny your business can’t pay.

Personal assets are generally threatened when all the partners in a firm are broke and business assets aren’t enough to pay dues. The partners of sole proprietorships are each 100% responsible for debts. Creditors can seize personal assets to pay off all of a company’s debts, not just the individual’s pro rata share.

When forming a partnership, owners are usually required to sign a personal guarantee for loans, leases and contracts, especially if they’re part of a corporation or LLC. Many suppliers, banks and landlords understand these shareholders don’t have legal liability for business debts, unlike members of a sole proprietorship. So, they often wont extend credit or loan money unless a personal guarantee is signed. Once this agreement is made, a creditor can sue to seize business assets if necessary.

Small corporations or LLCs might be required by banks to offer their house or real estate property as security for a loan. Collaterals work similarly to personal guarantees: if a business defaults on a loan, shareholders of the company might lose property and valuables when creditors sue for foreclosure.

Yet another way to lose personal assets is to sign a purchase agreement or service contract. Some agreements are in the name of a corporation while others display the personal name of owners. If you don’t read a document closely, you might end up being responsible for debt that would otherwise be in the name of your firm.

Other ways you might be held responsible for a firm’s debts is using your credit card to fund the organization or being the victim of fraud and bad recordkeeping.

If you have any more questions about your business, feel free to contact GovDocFiling here.