While most people consider some debt to be healthy, too much debt is certainly not good for a small business. It acts as a weight around your ankle, holding you back from accomplishing your long-term financial goals. Serious debt is something that creeps up on a lot of business owners, you’re not alone.
But how can you possibly ditch your debt?
Business Debt and Personal Liability
When serious debt is an issue, the first thing most business owners want to talk about is liability. What debt is exclusive to the business? And what, if anything, are you personally liable for? While there isn’t a straightforward answer to these questions, you should be able to determine, relatively quickly, what business debt can affect you on a personal basis.
For starters, if you’re operating a sole proprietorship or act as an independent contractor, you and your business are legally considered the same thing. You owe every penny that your business can’t pay, which means creditors can come after your personal assets when all of the business assets have been seized.
In most cases, general partnerships operate the same way. However, there’s an interesting difference. Because both you and your partner(s) are 100 percent liable for business debt, creditors can take money from any of the partners. That means if all of your partners are broke, creditors can seize 100 percent of the debt from your personal assets.
The benefit of operating under a corporation or LLC is that you and your business are considered separate legal entities. Creditors can’t touch your house or personal assets. But as always, there are some exceptions.
Creditors know that a corporation or LLC’s stakeholders aren’t liable for the debt. They’ll often require business owners and partners to sign personal guarantees; these promise they’ll satisfy the debt if the business is unable to do so. If you’ve signed any personal guarantees on your business debt, you are, in fact, liable. It’s also possible that you’ve offered up your house as collateral for a loan. Unfortunately, there’s no easy way of getting around this.
There are some other unique situations that could make you liable for personal debt, but this covers the most common issues. And regardless of whether or not you’re personally liable for your small business debt, it’s smart to start thinking about ways to dig yourself out. Debt can constrict your company’s ability to grow and can come back to haunt you, both personally and professionally.
6 Tips for Digging Out of Serious Debt
Digging out of business debt really isn’t all that different from pulling yourself out of personal debt. You have to find a way to spend less than you make and put the remaining money towards your debts until they’re paid off.
Don’t confuse the simplicity of the objective with effortless execution, though. It’s going to take some hard work, so roll your sleeves up and let’s get started.
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Source:: Business 2 Community