Can Your Business Creditors Go After Your Personal Assets?

The last 12 months have been brutal for a lot of business owners. While certain businesses have found ways to work around the COVID restrictions, there are some who never had a fighting chance from the beginning when they were forced to close down. Some have remained open and are just now starting to see a glimmer of hope but are so terribly behind on all their bills. There are many who have not paid their landlord for a year and are hoping that they can keep their lease because if they got evicted, that would pretty much be the final nail in the coffin.
If you own a business that is struggling financially in this pandemic, perhaps you’re asking yourself if business creditors can come after you personally if the business is unable to pay its financial obligations. Like a lot of business owners, perhaps you have not been making enough money to even pay yourself and your business has been on life support. Your customers may not be paying you on time, if at all, since they may also be struggling under the current economic conditions. Capital may be limited to keep up with the growing business expenses. These things cause serious cash flow problems and can lead to business insolvency. As the lockdown restrictions are being lifted, it’s a new day for some business owners to start rebuilding. Unfortunately, however, some businesses did not make it after a year of decreased or no revenues.
Depending on the type of business structure you have (sole proprietorship, LLC, partnership or corporation), you may be held personally liable for your company’s financial obligations if they are not paid. If you’re a sole proprietor, you are directly liable to creditors because you ARE the business. If you are an LLC or corporation, legally, you should not be because of the way you have structured your business – UNLESS you have personally guaranteed the debts of the business.
Unfortunately, this is unavoidable for small business owners because it is common for landlords, vendors, suppliers or other company creditors to ask for a signed personal guarantee before doing business with you. If your business is using credit cards, credit card companies will usually ask for personal guarantees as well. If you are in a partnership, your liability depends on whether you are a limited or general partner. General partners are liable for partnership debts while limited partners are not.
Even if you’ve already decided to close your business, remember that there they may still be personal liability issues that need to be addressed including unpaid payroll taxes (The IRS can under certain circumstances hold business owners personally liable. This is called the “Trust Fund Recovery Penalty” that is assessed by the IRS against individuals that they feel are responsible for paying the business payroll taxes. To quote from the IRS website: “If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including NRA withholding and employment taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.” Yes, you don’t even need to be the owner or one of the owners of the business in order to be found personally liable for payroll taxes if the IRS deems you as a “responsible person”.
In speaking with a lot of business owners, I find that a lot of them don’t even remember if they signed a personal guarantee when they incurred the debt. So, it is important to review all signed contracts and agreements to find out where they stand. For example, if you were forced to close your business and had to break your lease as a result, the landlord may still sue you not only for the lease payments that you missed but for the remainder of the lease as well. When reviewing your documents, also check to see if you had pledged personal or business property as collateral for the loan when you applied. If the debt is secured, the creditor can repossess the collateral and may still sue you for any deficiency.
It’s bad enough that you’ve lost your business, and if creditors have the ability to pursue you personally, you need to have a plan on how you can protect yourself and your personal assets to make sure that they are not put at risk in any way. If you are in this situation, it would be advisable to seek legal counsel to know and understand all the legal ramifications of closing your business.
Ray Bulaon is a bankruptcy attorney in Valencia who has successfully helped more than 5,000 clients in getting out of debt. For a free consultation, call 866-477-7772 or 661-775-4880. Due to current COVID restrictions, consultations are available by phone or video.