A business owner is the face and backbone of the company. Naturally, this comes with a long line of responsibilities, including the dreaded finances of salaries and taxes.
But your business life and personal life aren’t one, so you have to stay on top of your personal finances, too, no matter how intertwined the two seem.
Sadly, sometimes it’s impossible to avoid bankruptcy when you have a business. Now you may be wondering how intertwined your business and personal credit are. Will your business’s bankruptcy harm your own credit score? Keep reading to find out.
Your Exact Role as a Business Owner Has a Bearing.
You’re a business owner, but to what extent? There are three situations you could be in as the head of a company, and some have a brighter outlook than others.
1. Sole Proprietor.
In this situation, everything is on you. You are the business in the eyes of the law. So, if your business is bankrupt, so are you. You have to deal with the debts and hardships, and it could negatively impact your credit report for up to a decade.
In cases like this, you could try to sell the business rather than stay as the proprietor. But unless somebody has already shown a strong interest, who’s going to buy a business that’s just about ready to collapse?
2. General Partner.
What if the business doesn’t belong to you, but several general partners? In this case, you’re still responsible for debts within the business. But you also are responsible for debts related to the partnership.
Luckily though, this shouldn’t be on your personal credit report. While some creditors might report your business debts under your personal name, not all of them will. With what some creditors choose not to report, your credit score will be relatively unchanged, if changed at all.
That being said, if partners start suing other partners and you lose and fail to pay up, that’s probably going to hurt your credit score. Try keep everything friendly when going bankrupt with partners, but don’t dissolve the partnership and leave the business in the hands of a single proprietor. You know what happens then.
3. Limited Partner.
This category is going to cover limited liability companies and corporations, as well as limited partnerships. The circumstance is the same when it comes to your credit score.
In any of the three cases you can file for bankruptcy and it won’t (or shouldn’t) impact the credit of any party involved. If you’re going to end up bankrupt, this is probably the ideal way to do it right?
Well … no. There are too many risks involved that come back to bite you or another partner in the business. In this scenario, it’s not a great idea to file for bankruptcy, but you’re mostly free of liability if it happens. The business debts will only show up on your credit report in extremely limited circumstances.
Possible Exceptions That Will Allow Business Debts to Be Shown on Your Personal Credit.
It does say “limited circumstances” up there – so when will the business debts crop up on your personal credit report? There are two situations that could take place. These are:
- When a personal guarantee is involved
- With specific types of business taxes
Here’s what you need to know:
1. Personal Guarantee.
Sometimes creditors need owners and officers of businesses (usually small ones) to sign something called a personal guarantee. This is done in advance of extending credit to the individual’s business. It’s not required by every creditor though, so if you’re really against it, you could look elsewhere and get away with not signing.
When you sign this, you’re basically saying that if the business fails, you take the fall. All debt is in your hands, otherwise it’ll be reported as an unpaid obligation when it comes time to involve the credit bureaus.
Once reported, the unpaid obligation will affect your personal credit.
2. Business Taxes.
If your business taxes go unpaid, the responsibility might fall on your shoulders.
Not all taxes are waved when you file for bankruptcy, and one that’ll hit you is the sales tax, called a trust fund tax. Business owners sometimes withhold this when it comes to paying their employees, or they collect it from other people.
So that leaves you with this burden, even though they money technically belonged to the employee or customer once. See, it was the business’s owner to inform the government of these taxes, so you’re charged.
These taxes are going to have an impact on your credit. Plus, it can get worse if it enters your public records because a tax lien is filed against you.
Consulting With a Professional is Best.
Keep in mind that you should consult with an attorney, such as the professionals at www.ljacobsonlaw.com/pa/harrisburg-bankruptcy-attorney/ anytime you have questions about business bankruptcy. An attorney who is experienced in business bankruptcy matters can help you sort out how it can affect your personal credit, give you advice and put your mind at ease.