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Do you have to personally pay your business debts?

On Behalf of | Oct 6, 2022 | Corporate Law

As a business owner, there’s a good chance that you’re going to need to use financing and lines of credit at some point. You may need to take out a business loan just to start the company, or you could take out loans later when you want to expand and help the business grow. Loans can then be used to buy products, parts and materials, physical locations, vehicles and everything else your company may need.

When you decide to do this, just how much of a risk are you taking? Say that the business doesn’t work out and is forced to close without paying off all of the debts. Does this mean that you’re going to be personally responsible to pay those back?

Is your business an LLC?

If your business is a sole proprietorship or if you’re just running the company under your own name, perhaps on the side, then you may be responsible for any loans that you took out. Those debts were given to you individually and you still have to pay them back even if your business cannot.

However, if you started an LLC, it’s called a Limited Liability Company for a reason. You’re not liable for debts that are owed by the LLC. The loan was given to the company, not to you personally, and only the company has to repay it.

What if the LLC can’t pay back the loan?

If your business doesn’t have the cash on hand to pay off the loan, there are a lot of different options that you may want to consider. In some cases, business owners use bankruptcy to eliminate debt that they have taken on. In other cases, they’re able to restructure their debt so that they can pay it back at a later date.

But even if the LLC can never pay the loan off for some reason, you shouldn’t have to dip into your personal funds to make those payments. By setting up the right corporate structure, you’ve protected yourself from that level of risk.

Getting the details in place

When you’re starting a business, you can see that it’s very important to consider all of the details carefully. Be sure you know exactly what steps to take.