If you’re a small business owner in the Lone Star State, you may be worrying about how your company’s bankruptcy may affect your personal finances like your assets and credit score. Here are some important details you should know.
The personal liability for business debts
In the case of a sole proprietorship, you as the business owner and your company are considered to be the same legal entity. You are personally liable for your company’s debts. If your business can’t make payments on time for its debts, creditors may try to take your personal assets. Because your company isn’t its own legal entity, it can’t file an independent bankruptcy action, which means that you’ll have to file a personal bankruptcy to gain debt protection.
Generally, if you’re the owner of a limited liability company (LLC) or an S corporation, you wouldn’t be held personally responsible for any business debts. The company is its own entity and can file for bankruptcy independently of you. However, there is a chance you might be liable for certain company debts, especially if you personally guaranteed a loan or something similar.
The effects of bankruptcy on your personal credit
If you’re a sole proprietor, your credit and the company’s credit are the same. While the bankruptcy can remain on your credit history for up to 10 years, you should understand that it is seldom an absolute barrier to obtaining credit in the future. You can rebuild your credit quickly with the right steps.
For an LLC or corporation, the business’ bankruptcy filed under Chapter 7 or 11 shouldn’t impact your credit personally. However, if you personally guaranteed a business debt and don’t pay it, that can.
Keeping your business open through bankruptcy
There are several advantages to filing under Chapter 11 bankruptcy, one of the biggest of which is that your business gets to continue its operations while following a plan to pay down your business’ debts over time.
If your small business needs to file for bankruptcy, it’s important that you understand the process that pertains to your situation. Speaking to an experienced Austin attorney can help you understand the ins and outs of bankruptcy procedures in Texas.