Businesses may start struggling financially for all kinds of reasons. Perhaps key components or ingredients became more expensive, diminishing the profit margin for the organization. Maybe a competing business started operating nearby and put pressure on an entire sector of the local economy.
Previously successful business owners may worry that their companies could fail. They may reduce their own pay and make other difficult choices to keep the company afloat. In some cases, they may need to consider filing for bankruptcy as a way to keep the company afloat or discharge the business’s financial obligations.
Business owners may worry that their personal assets such as their homes or vehicles could be vulnerable due to business debts. Other times, they may worry that their future income could be at risk because of business debts.
Do business owners ever have responsibility for the debts owed by the company they’ve started?
Some owners may be vulnerable to debt collection efforts
The likelihood of business owners having direct liability for business debts depends on the type of company. A sole proprietorship does not provide much protection for the party operating the business. Limited liability companies (LLCs) and corporations tend to provide better protection for those worried about company liability.
Even then, however, the owners asset’s or future income might be vulnerable. In scenarios where outside parties can make credible claims of financial misconduct, business owners may have liability for organizational debts. Other businesses and individuals can take legal action asking the civil courts to pierce the corporate veil.
Such actions may make a business owner responsible for organizational debts. Typically, evidence of financial misconduct is a key element of such efforts. Commingling business resources with personal assets, embezzling from the company or failing to maintain appropriate financial records could all provide the justification necessary for outside parties to pierce the corporate veil and take legal action against a business owner.
Especially in scenarios where a business has become insolvent, taking legal action such as filing bankruptcy may be a necessary step to protect the owner of the organization from potential future liability. Understanding the risks that may a company the financial struggles of an organization can help business owners decide how to protect themselves and their interest in their personal assets.