Can You Be Personally Liable for a Business Loan or Line of Credit

A business loan or line of credit is a very common vehicle for facilitating cash flow, for obtaining large acquisitions of equipment or inventory, or for funding start-ups. When done properly, these loans can greatly aid your business -- but if something goes wrong, it's important to understand what it means to you as a business owner. Even though the business loan or line of credit was taken out against the business' credit, that does not necessarily mean that the business will be the only source held responsible for paying back the loan.

Traditional small business models

Most small businesses -- and some medium and large ones as well -- are either sole proprietorships or partnerships. These models are the simplest to set up in legal and tax terms, but also offer the least protection for the owner(s) if the businesses should fail. In most cases, sole proprietorships or partnerships are considered under the law to be the same as your person or your own partnership. Not only can your personal property be held against a defaulted loan, there is no distinction between the part of the debt that is personally yours and what part belongs to your partner; any and all collective assets could be seized regardless of the portion each partner has in the business.

Limited liability companies and corporate liability

In most cases, if you have a limited liability company or are making financial decisions for a corporation, you will not be held personally responsible for debts unless provisions to the contrary are made in the contracts related to a business loan or line of credit. Here is where it's extremely important to read the fine print before signing those loan documents. You may never know that you waived your personal protection from financial responsibility when you put your name on that dotted line until something goes wrong and you get a notice from the bank or court informing you of actions against your personal assets.

Before contracting or partnering with any type of business, it is always a prudent course of action to check with an attorney who specializes in the laws regarding that business.

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