Businesses run into commercial debt for a variety of reasons. When cash flow is low, many businesses will opt to take out a loan, a line of credit, or a credit card to pay suppliers, employees, vendors, or other bills. Oftentimes they will buy materials and other items on account. The purpose of this section is to discuss whether your business debt can also be considered personal debt.
Sole Proprietorships - Most small business debt will fall under this category. A sole proprietorship is a business that has no legal separation from the owner. All the profits and losses of the business are exclusively possessed by the owner. With this type of organization you have a loan or credit card debt in your business’ name the liability still falls to the owner to pay it, even if the venture dissolves or goes out of business. That means failure to pay a loan, landlord, or vendor could result in the creditor pursuing your personal assets (note: this usually takes a long time and requires a court judgment first).
Partnerships - There are two types of partnerships – limited and general. Most partnerships are general, where each owner actively participates in managing the business. Like a sole proprietorship, this option involves accepting any personal liability for any debts in the company’s name, even if the loan or credit line was only taken out by one partner. A limited partnership is different. Under this type of arrangement, there is a partner who operates the company, while the other partners are passive investors. In this scenario, only the partner who operates the business is personally liable for the debts accumulated by the company.
Limited Liability Company (LLC or L.L.C.) - Limited Liability Companies eliminates most personal liability for debts owed by the business. There are two scenarios where you may be personally responsible for the debt obligations of the enterprise: 1) you personally guaranteed the debt – many loans and credit card offers come with this provision to check your agreement to see whether you personally guaranteed the credit lines; or 2) your creditors can prove that your business was operating more as a sole proprietorship, and there was no legal separation between you and the business – this may be the case if you do not have a separate bank account for the LLC, you don’t use the official LLC name in business dealings, or anything along those lines.
S or C Corporations - Much like LLCs, S & C Corps protect the business owners from personal liability on any secured or unsecured debt owed by the company. This is one of the important advantages of incorporating or becoming an LLC. Like an LLC, however, a corporation will not protect an owner from commercial debt that was personally guaranteed.
Business Debt Consolidation Options
There are a number of debt relief alternatives available for businesses struggling with debt. Depending on the nature of the debt, there are several debt management solutions to choose from. Secured debt like a business mortgage, property and car loans, or equipment leases are much more difficult to climb out from under than unsecured credit lines like credit card debt or business loans. If the principal source of your debt problems is from secured balances, a debt workout plan may be the most suitable solution.
For credit card and other unsecured debt, your best debt consolidation option may be either debt settlement, also known as debt negotiation, or credit counseling. Both of these options can help your company consolidate your payments and lower your debt much faster than is possible otherwise. Other than the fundamental goal of debt elimination, these options are very different from one another.
In a debt settlement program, your appointed representatives negotiate with your business’s creditors to get them to accept a lump sum payment in full satisfaction of what your company owes. Usually the target settlements range from between 40 and 60 percent of the debt at the time of settlement. Since you are able to reduce debt balances instead of just the interest, the savings from this type of debt solution can be tremendous.
A debt counseling service aims at reducing your interest rates and restructuring your business’ debt obligations to help you debt free. Both are valid debt relief options for businesses plagued by high debt, but the importance of choosing the best debt management company cannot be underemphasized. To get matched with a pre-qualified provider, submit a form now!