Entrepreneurs who start their own businesses and those who inherit a family company want to see their organizations thrive. When a company starts to struggle, they may work long hours and try to come up with creative solutions to keep the company afloat.
Ideally, they do so with an eye on limiting their own personal liability. Business owners often assume that they have protection from personal liability for company debts if the business fails or they decide to file for bankruptcy. That is true in many cases. However, there are plenty of scenarios in which those who start companies or take over their operations become personally responsible for organizational debts.
When is the owner of a business at risk of personal financial responsibility for their company’s debts?
When they don’t have organizational protection
Entrepreneurs starting companies have to consider different business types carefully to choose the best option available. Some entrepreneurs end up selecting a general partnership or sole proprietorship by default. It may seem like the fastest and least complicated solution available.
What they may not realize is that their decision limits their personal protection. Formal business structures like corporations and limited liability companies (LLCs) help shield entrepreneurs and owners from direct liability if the company fails or incurs substantial debt. Those who do not have the right business structure in place could be at risk of personal responsibility for the debts owed by the business after it fails.
When financial misconduct has occurred
Even those who start more complex business entities can sometimes face financial liability for company debts. In scenarios where the company becomes insolvent, undergoes restructuring or pursues bankruptcy, creditors and those with judgments against the business could try to hold the owner accountable.
If there is any indication of financial misconduct, outside parties can ask the courts to pierce the corporate veil as part of their debt collection efforts. Doing so allows those creditors or plaintiffs to hold the business owner responsible for the company’s financial obligations.
Misconduct could include inappropriate transfers of company assets, commingling personal property with business resources or embezzlement. Business owners preparing for bankruptcy or attempting to restructure a company to keep it operational may be at risk of personal financial liability in some scenarios.
Exploring solutions for reworking company debt can help owners protect themselves from financial obligations. Restructuring an organization is one of many options that could an organization overcome the consequences of a few bad quarters. The nature of the debt and the type of business involved can influence the best way to handle insurmountable business debts.