Basic Debt Risks for Each Business Structures

Unfortunately, in our economy, not all businesses thrive and not all businesses survive.  The good news is that there are different business structures to protect owners from the businesses liabilities.  This is why many people seek advice from a business attorney prior to forming their business.  However, each business structure has certain risks and rewards to the owners or shareholders. When a business fails, the owners and shareholders might face some form of liability or debt to its creditors.

Sole Proprietorship

A sole proprietorship is when the business is owned and operated by one person.  In this case, the owner and operator assumes all the responsibility as well as the risk.  In this type of business structure, the owner will be liable for all debts.

Partnership

In a straight partnership, the all partners are equally liable for all of the partnership debts.  Although each partner will be 100 percent liable for the debts, there is less risk than a sole proprietorship, because creditors can collect from all partners.  This means, that personal assets for all partners are at risk.

Limited Partnership

Limited partnerships are little more complex than a regular partnership.  In a limited partnership, at least one partner must be liable for all of the claims.  Therefore, the other partners might be protected from the debt of a failing business.

Corporations

A corporation is a separate entity.  Think of it as a person that carries their own debt.  Corporations protect owners/shareholders from the corporations debt and liabilities.  Therefore, creditors cannot go after the owners assets.  The reason that not all businesses are corporations, is because they are more expensive to create and maintain.

Personal Guarantor

This is just a summary of the possible liability held by you as an owner of the corporation.  Even if you own a corporation, you might still be held accountable for the corporations’ debts. When small businesses take out loans to use as capital, the creditors might require a second guarantor.  Of course, that guarantor is normally the owner. therefore, whether the business is a partnership or corporation, you might still owe the debt after the business dissolves.

This is why all business owners should seek the consultation of a business or bankruptcy attorney prior to obtaining debt.  Moreover, if the business is failing it is especially important for business owners to determine whether or not they will be held personally liable for business debts.