As a business owner, you have several aspects of your organization to manage, from salaries to sales to taxes. There are financial matters in your personal life to stay on top of as well. If you’re considering closing your business and filing for bankruptcy, you may be wondering how this decision will affect your personal finances and your credit score.
In order to shed more light on this important topic, we’ve broken down and detailed the effect of business bankruptcy on personal credit scores by the type of business below.
If you own your business as a sole proprietor, you are responsible for all debts owed. As a sole proprietor, there is no distinction between you and your business; instead, you are made personally responsible for any loans, assets, and debts. This means that you will need to file for a personal, rather than business, bankruptcy. Any personal bankruptcy will negatively affect your credit score and remain on your credit report for quite some time, depending on the type of personal bankruptcy you choose to file. (The maximum period is ten years.)
What if you own a general partnership and are a general partner? Matters get a little more complex in this scenario, but you do have more options than sole proprietors. First, you are still responsible for all of the business debts as well as any partnership-related debts. Your partnership may file for business bankruptcy, but this should not show up on your credit report. Keep in mind that you will still be responsible for any debt left over after liquidation, and some creditors may report these debts under your name.
Limited Partners, Corporations, and LLC
In general, limited liability companies and corporations have more protection than sole proprietors and general partnerships. These businesses may file for business bankruptcy, which as we’ve discussed, will not affect your personal credit score in most cases. You are not personally responsible for the debts owed if you do business under an LLC or corporation.
However, it is important to consider any personal guarantees you may have signed in the past with creditors. When seeking to obtain credit for your business, you may have agreed to be personally responsible for some business debt. If your business files for bankruptcy and debts made under this personal guaranty are paid in full, it should not affect your credit score. On the other hand, if the debt is not paid off completely (or at all), you are now responsible for the sum you guaranteed. Any unpaid obligations in this scenario will appear on your credit reports and affect your personal credit score.
Be sure to check with credit card companies by contacting their customer service team. Look up any accounts under your social security number. If there are accounts listed under your personal social security number, you are most likely liable for debts. You should also review credit card agreements. In this case, it’s better to know as soon as possible what you are personally responsible for so you can prepare to take care of the debt and protect your credit.
A Word on Taxes
As you review which debts you are personally responsible for, keep an eye on your business taxes. Taxes that you collect from sales or employee salaries must be submitted to the government, or you will be personally responsible for them. A tax lien can severely affect your credit score.
Regardless of the type of bankruptcy you choose to file, having experienced counsel on your side is invaluable. To protect the future of your finances, both business and personal, reach out to bankruptcy attorneys you can trust at Tyler, Bartl & Ramsdell, P.L.C. Contact us to today to get started!