Why Corporations and LLC are poor substitutes for learning how to read financial reports.

If I had nickel for every small business owner who started a business, formed an s-corp or an LLC and then got to walk away from all of the business debts when business went south I wouldn’t have enough to buy a cup of coffee.  The idea that a small business corporation or LLC provides a shield against liability is not only overly simplistic, in practice it is rarely useful.  The reason is simple, lenders don’t lend to small business without a personal guaranty.  Even if you don’t start out with loans, most everyone taps into the stream of easy expensive business lending to help “bridge the gap” when things start to slow down.

People approach the subject of a personal guaranty with a sense of cognitive dissonance.  They know that they formed the company with the idea that they would not be personally liable, but they go ahead and sign a personal guaranty somehow believing that if the business fails they will have bigger things to worry about than just the bank or, worse yet, thinking that even though they planned for a downside they are going to act as though there will never come a day when that personal guaranty is actually used against them.  This enables them to erect a mental barrier between the reality of their circumstances and their hope of avoiding loss.  They stop paying attention to the real numbers.

The best way to avoid personal liability for debts of a business is to never borrow money with a personal guarantee.  The next best way to is spend time learning how to produce and read profit and loss statements, balance sheets, and cash flow statements.  There is no substitute for knowing when to pull the plug to avoid personal liabilities.

This article is written by an attorney at Wyatt & Mirabella, PC. Always consult an attorney before making any legal decisions. To make an appointment today for a free consultation, please click here to contact us.

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