When establishing a business, one of the most important recommendations is to keep separate bank accounts for business and personal expenses. Doing so makes it easier to keep records and establish which expenses are business and personal. Many business owners, however, may not be aware of potential impacts that their personal finances may have on their business. Making poor financial decisions in your personal life may impact your business if you’re not careful.
One of the most common ways in which personal finances impact business is when the business owner files for bankruptcy. Each case is different, and your business won’t always be impacted, but it could be. According to an article on FindLaw.com titled, “Is My Business Liable for My Personal Debt,” it all depends on circumstances involved with the bankruptcy. “If you decide to file for bankruptcy, it depends on which kind of bankruptcy you choose. A Chapter 7 bankruptcy, or liquidation bankruptcy, could potentially shut down your business. Because almost all of your assets will be liquidated to satisfy your debt under Chapter 7, and because most business assets are non-exempt, your business assets will likely be sold as well.” This rule typically applies to sole proprietorships, so you may be able to protect your business by establishing it in another form at start up.
If your company is large or publicly traded, your personal finances will not likely affect your company’s ability to borrow money. But many lenders examine small business owners more thoroughly before deciding whether or not to extend a loan. An article on the Small Business Trends website titled “How Personal Credit Affects Small Business Borrowing” explains, “Many, if not most, lenders will look at your personal credit score if you are a small business owner seeking a loan for your company. A 2006 report written for the U.S. Small Business Administration found that 71 percent of banks used small business owner credit scores when underwriting small business loans.”
Before establishing your business or entering into a partnership in which you own any part of a company, be sure to have a lawyer look over your contracts and articles of incorporation. By doing so, you can reduce your level of personal liability for your company’s finances, and you can also limit your own liability with regard to your partner’s personal finances.
This article was written by Alaina Brandenburger for CBS Small Business Pulse