Many new business owners need to take out loans just to start the business and get it off the ground. This means that they start with significant financial obligations. There is an inherent risk in taking these on, especially if the business has not proven that it can make an income. But it may be the only option that an owner has because they need that startup money for real estate, materials and supplies, equipment and much more.
What some business owners worry about is what will happen if they default on those business loans or if they have to declare bankruptcy. They are concerned that their personal property would be at risk. Someone who owns a family home or has significant retirement savings, for example, may be concerned that they could lose those assets.
Your business structure
In many ways, it depends on the type of business you run and how you structured it when you set it up. Choosing the correct business structure can give you some financial protection.
The most common example of this is a limited liability company (LLC). Establishing an LLC means that your business becomes an entity in its own right and can take out loans.
If you then default on those loans or declare bankruptcy and have to pay creditors back after liquidation – as would be done under Chapter 7 bankruptcy – creditors only have a right to the assets owned by the business. Your personal assets, such as your retirement savings or the family home, are protected.
Navigating the process
For any business owner, it can be complex to address financial obligations, bankruptcy options and much more. It is important to understand exactly what legal steps to take as you go through this process.