Businesses often take out loans or take on debt. A company may need startup cash just to get off the ground, for example. In another case, a company may have an order for a shipment of products, but they have to purchase the parts and materials to manufacture those products in advance.
Clearly, the business is responsible for paying off this debt. Ideally, the company can simply sell the end products and pay off the loan they took to buy the parts and materials. Similarly, a startup business may gradually pay off its initial loans as the company grows.
But what about the business owner? Say that the company fails to meet its obligation and can’t pay off these debts. Does that mean that the business owner is suddenly responsible and needs to pay the debt themselves or risk losing personal assets, such as their savings, retirement fund or even their home?
What type of business is it?
The business structure is very important. In some cases, business owners can be responsible for the debt if they have essentially taken it out in their own name.
But in most cases, there are ways to reduce liability. For instance, if the business is set up as a limited liability company, this means that the owner isn’t personally liable for any of its financial obligations. If the business can’t pay off the debt, it may have to close down or go through bankruptcy, but the owner isn’t going to lose their personal assets. This allows business owners to take on debt without risking their personal security, their savings or the life they are providing for their family.
Structuring your business correctly can have many potential benefits. Business owners need to know exactly what legal steps to take as they do so.