Most businesses will incur some form of debt as a necessary part of operations, whether it's the use of credit cards or bank loans. But unsustainable debt and interest charges, without increased revenue or investor capital to cover it, can put the health of any business in jeopardy. This section contains a glossary of terms related to "bad" debt, an overview of options for businesses that cannot pay their debts, a checklist to help small business owners prioritize their debt payments and other resources for entrepreneurs dealing with debt.
Options When You Can't Pay Your Business Debts
When a business accrues debts it can be scary to try to address the problem. Creditors may begin threatening legal action against the business or you personally. Depending on how the business is organized and the degree to which you have agreed to guarantee the business's debts you may have some options regarding how to deal with the problem and your creditors' ability to take assets or funds in repayment. Your position will also determine whether bankruptcy is a good option to resolve your insolvency. An important exception relates to payroll taxes. Regardless of how the business is organized the Internal Revenue Service will hold a business owner responsible and personally liable for any unpaid payroll taxes. However, in many other circumstances how the business is organized can be quite meaningful:
- General Partnerships and Sole Proprietors -Sole proprietorship means that you and your business are synonymous. Creditors and others can hold you personally liable for your business's debts and can claim your personal savings in order to satisfy debts. General Partnerships are similar except that there is more than one owner involved. Every general partner can be held personally liable for all of the business's debts, which can lead to some very uncomfortable outcomes.
- Limited Liability Companies and Corporations - Limited Liability Companies (LLCs) and corporations do not generally create personal liability for the business's debts. However, you may voluntarily obligate yourself when seeking a loan or credit since many financial institutions will insist on personal liability as a condition of the loan or credit.
Bankruptcy is an option in many situations where a company is no longer financially viable. A bankruptcy should be carefully planned, however, since preparation can help preserve some of the company's value or even help it recover. Sole Proprietors have the option of filing for either Chapter 7 or Chapter 13 bankruptcy if they otherwise meet the requirements for these forms of relief. Those who have waived the personal liability protection provided by LLCs or corporations may also need to undergo a personal bankruptcy. Chapter 7 bankruptcy involves the liquidation of all assets, the distribution of the monies to creditors, and the cancellation of the remaining debt. Chapter 13 bankruptcy involves an income-based repayment plan approved by a bankruptcy court. In this case none of the property is sold and no debt is cancelled.
Help for Your Business During Financial Trouble
If your business is struggling and may fail or enter into bankruptcy proceedings there are a number of steps that can be taken to protect yourself, the business, and the business's assets. These suggestions are also intended to help avoid criminal liability. More detail can be found about these suggestions and their reasoning in the related article.
Make sure your taxes are current.
Cut your spending.
Be honest about your debts.
Don't transfer business property to hide it from creditors.
Don't pay one creditor over another.
Keep debt and bank accounts separate.
Renew your insurance.
Return unwanted leased property.
Sell your business.
