If your small business fails, are you responsible for the debt?

On Behalf of | May 2, 2024 | BUSINESS & COMMERCIAL LAW - Business Formation & Planning

It can be very expensive to start even a small business. Someone who wants to open a local restaurant needs to spend tens of thousands of dollars on equipment and renovation costs just to get the building ready – and that doesn’t even consider things like a business license, paying employees, buying the real estate, etc.

What many prospective business owners have to do is take out business loans or take on debt. They use this money to finance the company in the belief that it will be lucrative in the future and they’ll be able to afford to pay off that debt.

What happens if the business fails? If you took out $100,000 in loans, are you responsible for paying that off even though you no longer have a business – or the income you expected?

It depends on your business structure

You may be responsible in some cases. For instance, some business owners are just running a sole proprietorship. They are personally responsible for the debt that they take on.

But you can structure your business in various ways to protect yourself from this debt. Perhaps the most common is starting an LLC, or a limited liability company. You can then get business loans in the company‘s name. The LLC is responsible for paying off that debt, but you are not personally liable if the company goes under or has to declare bankruptcy.

This is just one of the reasons why it’s so important to carefully consider your business structure when starting a new business. Make sure you understand all the options you have and the legal steps you’ll need to take.