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Startup Finance – Knowing Your Liability to Business Debts

By Anthony Trollope on Nov 17, 2008 in Startup Finance

Business debt for a variety of reasons is a necessity. The majority of startup businesses for instance will take a loan out to help them in the short term of their business initiation. This investment is then used to purchase stock, manage overheads and of course, to settle any startup costs. Business loans are quite often a long term liability, so in terms of paying it back; this is a long term debt that the business will for quite a while be tied to. Slightly shorter term debt include that of taking a line of credit or even using a business credit card to pay for your short term expenditure.

In terms of looking at your liability for these debts, for instance as a business or as an individual, we must look at how your business functions and what type of legal entity it is. We will look at the two of the main types of business entity and summarise how their debts are allocated in terms of liability.

Sole Proprietorships

This is the simplest form of a business entity but also shares arguably the highest risk in terms of liability. As you may be aware, a sole proprietorship is not a separate legal entity and any debt is secured by personal liability, i.e. you as the business owner. Therefore, all profit and losses that a business accrues are exclusively held by the business owner. With that in mind, any such debt is the responsibility of the business owner to ensure is paid. Failure to do this will ultimately result in your personal assets being implicated and potentially taken as payment for your businesses debt.

Limited Company / Limited Liability Company (Ltd or LLC)

The major difference here is the company is a completely separate entity from a sole proprietorship. The company is a legally separate entity and therefore eliminates most personal liability for any debts that are owed by the business. There are two situations that are worth mentioning that could mean you are personally responsible for the debts owed by the company and they are; 1) you guaranteed the debt or personally guaranteed that any debt the company accrued would be covered by you personally. 2) That your creditors (those who you owe money to) can prove that your business was trading as a sole proprietorship and therefore there was not a separate legal entity. The second is fairly rare and as long as you are using separate bank accounts and ensuring all transactions/operations are within the limited company and not you personally, it can be avoided fairly easily.

Now that you are aware of your liability, if you should run into debt it is important to manage it and not allow it to get out of hand, whether you are a sole proprietorship or a limited company it makes little difference, a debt is a debt. There are a number of business debt consolidation organisations who specialise in helping you get out of debt so don’t be afraid to stop in for some free advice from time to time should you find your business debt is spiralling out of control. All debt can be managed, if managed correctly and not avoided that is.

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5 Comment(s)

BlogNet Awards Team | Dec 11, 2008 | Reply

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Chris R | Dec 11, 2008 | Reply

I offer Merchant Cash Advances.

Sadly, many business that are in debt trouble come to me.

Often times I can help them, while other times I am the final nail on their business coffin.

Of course I try to distinguish between the ones that I can help and the ones that I cannot, but I am not always successful.

I would love all of my customers to be successful. Everybody wins.
Zack Zufelt | Jan 24, 2009 | Reply

Anthony, your blog is a great resource and support line. Keep up the great work.
Sharon Wilson | Jan 24, 2009 | Reply

This is a very important topic and thanks for discussing it here. It will certainly put some new entrepreneurs’ minds at ease. I’m sure this information will be very helpful.
Russell | Jan 27, 2009 | Reply

Thanks for an informative and succinct post. On the nail!

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