If your business is in debt, you may be worried that it’s insurmountable. The business is going to have to close. There’s just no way that the current model is sustainable, even if the reasons for it are things that are out of your control – like inflation or a recession.
But what you’re worried about is that you may be personally liable. If your business closes down with $50,000 in debt, do you have to pay that $50,000 – to the best of your ability – out of your own money?
What type of corporate structure did you choose?
The answer to this question really depends on the corporate structure that you’re using and how your business was set up when you first opened your doors.
For instance, maybe you’re running a sole proprietorship. This is a very simple structure where you are essentially operating the business yourself. But you are personally liable for the debts that the business takes on because all debts and income generated by your sole proprietorship are considered personal. This means that you would still owe on the loans that you took out, even if the sole proprietorship went bankrupt.
On the other hand, you may have chosen a limited liability corporation (LLC). This structure gives you some financial protection because the business is liable for the debts, but you are not. This is one of the main reasons that people use an LLC. This type of business can go under and the business has to pay off the debt that is owed, but you do not.
Situations like this can get very complicated and there’s a lot of money on the line, so always be sure you know exactly where you stand and what options you have.