Set Up to Fail

It’s an everyday saying – “America was built on entrepreneurship.” Well, it’s a fact – if you look back to the industrial revolution and the advent of steam power to the release of Apple’s new Ipad – people and ideas start businesses. Unfortunately, not every business is a success story and while the law protects owners or shareholders to a certain degree, if you don’t set up your business correctly, you can expose yourself financially in ways you never expected. In fact, many lenders are requiring a personal guarantee on business debt. It is that guarantee – that is compounding a potential financial crisis ten-fold. So when a business is failing, and the banks want you to pony up cash – from your personal bank accounts – that’s when clients come to my office and personal bankruptcy is albeit inevitable. To illustrate the point – not log ago a client hired us to represent her in a personal bankruptcy. Susan operated under the name Dancing Feet Inc. She also operated under the name Dancing Feet. As representative of Dancing Feet, Susan signed all the contracts. In fact, all letterhead, business cards, credit cards were all under the name of Dancing Feet. But what about this entity called Dancing Feet Inc.? Well, Dancing Feet Inc. was never registered with the State nor legally incorporated, so Dancing Feet Inc. is essentially a sole proprietorship – as is Dancing Feet. That means that Susan is 100% personally responsible for the debts of Dancing Feet AND Dancing Feet Incorporated. In this case, she exposed herself to 1 a million dollars of debt – that Susan was personally responsible for to pay to creditors. So in this case, Susan filed for personal bankruptcy, even though her debts were primarily non-consumer (business) and in the end, she will no longer be responsible to pay those debts. The lesson here is that if you own a business, you must ensure it is set up correctly. Just putting “Inc” or “LLC” after a business name, without implementing any of the required legal formalities can expose you to liability beyond your imagination – and you might end up personally liable for all of your business debts.

 

Bennett Cunningham is a Bankruptcy Attorney licensed in Texas and is a former Investigative Reporter for the CBS Television Station in Dallas. Mr. Cunningham has garnered 7 Regional Emmy Awards, including the Best Investigative Reporter in Texas 2 years in a row, as well as several National Awards for his exposés into the mismanagement of taxpayer dollars and government waste.

This blog is not meant to give you legal advice. If you need to seek legal advice, you should consult a licensed attorney in your jurisdiction.

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