Sole Proprietorships, Partnerships, LLCs and Corporations
There are at least three types of companies that a consumer can be involved in. There is single proprietorship in which it is just the consumer himself/herself who is running the business. His/her business bills, business bank account statements, invoices, letterheads and other business correspondence are all in his/her name.
What about the debts?
He/she is personally liable for all business debts which are not treated differently from his/her personal debts. The consumer trading or using his/her business name is not different from his/her consumer self. He/she and his /her business are considered as a single entity.
What are its implications?
It means that all of the business’ unprotected assets are fair game to the creditors. Unlike corporations, the individual consumer/businessman does not have legal protection from losses or lawsuits filed against his/her business. If the business is sued, since the business and the consumer are one and the same, then all legal obligations fall on the consumer.
How then can sole proprietors protect themselves?
One option for the sole proprietor is to form a limited liability company or LLC. That way the business is going to be protected by the limited liability clauses enjoyed by corporations and can still be treated as a sole proprietorship when it comes to profits and losses.
What is LLC?
LLC stands for Limited Liability Company. Limited liability means that the sole proprietor only stands to lose what was invested in the LLC. Forming an LLC is an option for sole proprietors to enjoy some of the benefits of a corporation- like asset protection, a separate legal entity for personal protection, tax savings, and all the profits and losses of the LLC owners are reported on the personal tax returns.
The protection given to shareholders of a corporation is also given to all LLC owners. It means that the creditors cannot legally go after an LLC member’s personal possessions like his/her houses or cars. The creditors/lenders/collectors can only go after the assets that were invested in the LLC. Another privilege that an LLC membership can provide is the protection from contract debt.
The consumer can also be involved in a partnership. The consumer and his/her partner are jointly liable for all profits and debts in their business. The income tax is only deducted from their share of the business profits.
In the event that the business incurred debt and is not able to pay, both partners can be prosecuted for the overall debt; the court would not divide that debt between the partners’ shares.
In the event that the creditors are not able to obtain payment from one partner, they will automatically seek payment from the other partner. The court does not have a legal requirement for a written partnership agreement (for when something untoward happens), all that is required is the appearance of the names of the partners on the business notepaper.
What is the importance of having a written partnership agreement?
In the event that the partnership is dissolved, either one or both of them, if they want to, may inform all of the existing creditors about him/her not being anymore responsible for debts incurred after the partnership has been dissolved. The business notepaper should also strike out the consumer’s name on it, make sure that it no longer appears on any of the letters. The consumers should not forget to keep copies of all the written transactions.
What are some of the issues that may arise from the partnership getting dissolved?
• If one of the partners has given a personal guarantee or a charge to a bank as security for the business debts, make sure that the bank knows and accepts that that partner is the only one responsible for any debt incurred before the partnership is dissolved.
• If one of the partners declares bankruptcy and has gotten court approval—and it was discharged, the debt will be written off for that partner only. The creditors may still pursue the remaining partner former partner to take full responsibility for the debt. What does it mean? If the other partner filed bankruptcy then it means that this partner has nothing that the creditors may want, on the other hand, the other partner who seems to have something to lose—stands to really lose.
It sounds unfair, what can be done in cases like that?
If one partner feels cheated he/she has the right to sue the other partner to make them contribute or pay their share of the debts.
Other articles about relationships and debts:
Debts and financial problems in marriages and divorce
Credit & Debt Problems in Family Relationships