Taking out loans is often a part of helping a business grow. For instance, a business owner may not have the capital to create enough products, even though they know there is plenty of demand. Taking out the loan gives them the money that they need to create the products, make the sales and pay the loan back – while making income on top of those payments.
However, business owners are aware that loans also represent risk. If things don’t work out, owners may not be able to pay back what they owe. If this happens to you as a small business owner, are you personally responsible for that debt? Would it put you at risk of losing personal assets, like retirement accounts, bank accounts, your home or even your car?
Your business structure
To a large degree, it depends on the type of business structure that you use. For instance, maybe your business is just a sole proprietorship. You are essentially taking out loans in your own name, so you would be personally responsible for paying them back.
But many business owners will incorporate as an LLC or a limited liability company. When they do this, personal assets and business assets are separated. Only the business is responsible for paying back that loan. If the business fails and has to close, you will not be personally responsible for paying off that debt. You would not have to worry about losing your personal assets. This can be beneficial when weighing the pros and cons of taking financial risks in business.
It’s important to understand all the legal options you have and the steps to take to set your business up properly.