According the U.S. Bureau of Labor Statistics most new small businesses will fail within the first four years. That’s a sad fact, so it’s important to make sure if it happens to your small business that you don’t have any personal liability for the debts of the corporation, limited liability company, or limited partnership. If you’re a sole proprietorship or general partnership it won’t make any difference as these types of ownership don’t provide any liability protection to the owners. For an interesting story that clearly illustrates the idiocy of operating a business as a general partnership, read my novel, Cash Call, a legal horror story about a failed restaurant franchise.
Although operating as a corporation or limited liability company can protect the owners from personal liability, it’s not automatic. For example, a potential client recently came in complaining that he was being harassed by an old creditor from his bankrupt corporation. After quizzing him for awhile I learned that the creditor involved was the county and the debt was for personal property taxes. Ordinarily a corporate bankruptcy would have taken care of that liability but after examining the records I discovered the tax bill was in my client’s name. This was incorrect but since my client hadn’t got it corrected he had a problem. Even if he had filed a personal bankruptcy he still might not escape the debt since the claim of a governmental entity is a priority debt and not necessarily dischargeable.
So, it’s imperative that the small business owner carefully check every bill that comes in and make sure it is in the name of the corporation or LLC and don’t leave off the "Inc." or "LLC" on the name as that’s what protects you. If those three magic letters are left off there could be an assumption that the business is a DBA (doing business as) of the individual owner or owners.
Another problem is that many creditors insist on the owners guaranteeing their debt. Although the easy thing to do is to cave in and sign the guaranty, it’s a very bad idea. There are usually many vendors to choose from, so it’s usually not hard to find one who won’t insist on a personal guaranty. Banks and landlords are more difficult, but if you shop around and let these creditors know there won’t be any personal guarantees many times these creditors will back off. Remember, creditors will always try to get as much collateral and as many personal guarantees as they can, so stand your ground.
To find out more about what can go wrong in a small business and what to do about it, check out William Manchee’s new non-fiction book, Go Broke, Die Rich, Turning Around the Troubled Small Business. Go Broke, Die Rich and Cash Call are available in paperback, audio MP3, and for audio download at Audible.com.