You take on a lot of risk when you start a business. You often have to leave your job or cut back your efforts at career development to focus on the new company. You invest your time and money in something that may never repay your efforts. Even your personal relationships and marriage could take a hit if you convince other people to invest in your company or work for you.
One risk that people don’t consider carefully enough is the possibility of creditors coming after their personal property for business debts. If the company eventually fails or files for bankruptcy, creditors that you owe money to will pursue any possible avenue to get money back from you. When can creditors make a claim against your personal assets due to business debt?
If you have commingled business and personal assets
One of the first pieces of advice offered to those starting a new business is often to create a formal entity and start a bank account as soon as possible. Using your own name or personal finances for business purposes, even in the start-up phase, can constitute commingling.
When you use your personal credit cards and bank account to cover business expenses, these become quasi-business assets. Creditors might be able to make a claim against those assets if you don’t have business assets to repay them in the future. Keeping all of the accounts and assets as separate as possible can help reduce your risk of commingled assets becoming vulnerable to creditors.
If the creditor can claim wrongdoing or fraud
Regardless of what kind of business structure you use, lawbreaking, fraud and missing paperwork could all lead to creditors coming after your personal property. Even if you have a corporation or LLC, creditors can sometimes pierce the corporate veil to hold an executive or owner personally responsible for company losses and debts.
Such a process becomes much faster and easier if there is clear documentation of illegal activity or fraud conducted by the individual in question. Good practices while operating your business help reduce the risk you take if the company fails or struggles with debt.
You may also need to consider bankruptcy as a solution for your business when debt reaches a point where it affects your management of the company.