A great many business owners own their business as a sole proprietorship. After all, it is the default form of business ownership if a person does not take any further steps to create a business entity other than setting up shop. But this is a dangerous practice with many pitfalls that can be avoided with proper business planning. If you have not registered as a limited liability company (LLC) or corporation, and are simply operating as a sole proprietor, what might happen if you cannot pay your business debts?
When you run your business as a sole proprietor, you are the same as your business. For instance:
- You will sign and guarantee contracts personally
- You will take out business loans personally
- You will pay service providers personally
- You will file taxes on your personal returns, most likely using your social security number rather than an EIN
By running your business as a sole proprietor, you are making yourself liable for the debts of your business. If your business fails, you cannot walk away from the debt obligations. The lenders can hold you personally liable for the debts and will pursue you vigorously if you have any assets to speak of.
Or take, for instance, if your business gets sued and the lawsuit is successful. The person suing you can go after your personal assets, such as your house, car, financial accounts, and wages. You have no personal protection that an LLC or corporation might offer. Instead, you will be left holding the bag and you may end up losing your life savings.
Many sole proprietors whose businesses fail may end up needing to file a Chapter 7 bankruptcy, also known as a “liquidation bankruptcy.” A Chapter 7 bankruptcy requires the sale, or liquidation, of your assets to pay your creditors. If you need to file bankruptcy to get rid of business debt from a sole proprietorship, you may have to forfeit your remaining personal assets to pay those business creditors. A Chapter 7 bankruptcy will also remain on your personal credit report for up to 10 years. This will make it quite difficult for you to pursue any new business opportunities, as lenders will see that prior lenders lost the money that they loaned to you.
Call a Houston Business Attorney at Weisblatt Law Firm, LLC, Today to Discuss Whether Sole Proprietorship Is Right for You
While being a sole proprietor is the default, it is not necessarily the right form of business ownership. There are many options available, including limited liability companies (LLCs), corporations, general and limited partnerships, and limited liability partnerships. Many offer more protection to your personal finances than a sole proprietorship. An experienced business attorney, such as Andrew Weisblatt, can help you explore your options and figure out the best business entity fit for your business needs. Contact the Weisblatt Law Firm, LLC, today (713) 352-0847, or via our contact form, to discuss sole proprietorship and its alternatives. Starting with the right business entity now will save you a headache later.