Business Debt Management Part 1

One of the most exciting things I ever do is help someone to start a new business. Although it is very hard work to be one’s own boss, I disagree with the critics of small business who posit that failure is inevitable. For what it’s worth, Edison and Westinghouse probably would not agree.

This is part one of two debthelp.com articles for the millions of Americans who want to manage their debt through an existing business or in starting a new one. Lawyers will tell you that it is important to find the right ‘form’ of a business, but I prefer to call it the right ‘shape’. You must find the type of business that is shaped protectively around you and your assets.

There is no success without failure, but no successful person has ever let failure hold him or her back. When someone tells you not to try, they are probably voicing their worry of unmanageable debt and lack of profit. Maybe it is time for a more unconventional plan toward success. It is time to ask, “How can I take advantage of failure and debt, in order to succeed and make a profit?” Choosing the shape of your business is central to your business plan.

Sole Proprietorship is the most common form of business ownership. Generally, this form requires that all of your debt be treated as ‘personal’. Business debt essentially has the same impact on your finances as if you put it on your own personal credit card. To secure credit for a sole proprietorship, you will provide your social security number -- a pledge of your personal assets and credit.

Corporations & LLCs are common forms that usually separate business credit and debts from your personal accounts. However, there are exceptions to this credit and debt protection, as a poorly formed corporation sometimes still can be treated as a personal asset. To ensure that your personal assets are protected from your business debt, consult an attorney about this very specific issues.

Partnerships are fairly common business forms because they are quite easy to establish. As in a sole proprietorship, business debt is considered personal, but both your debt and the debt of your partner can affect your personal credit. This is double debt exposure. If you are in business with someone who has horrible credit, your credit could be affected negatively.

√ Locate your Secretary of State’s business division online. Most states have links to required business forms that you must fill out, such as taxes and licenses. The costs associated with these online forms will save you time and money over most other options, such as attorney filings.

√ If you are looking to consolidate personal debt, and you own a business in the form of either a sole proprietorship or a partnership, ask your debt consolidator if he or she has worked with commercial debt consolidation in your state. State laws vary greatly in regard to personal debt liability for a business.

√ Contact your nearest Small Business Administration. It can provide you with free counseling, often with the Service Corps of Retired executives. They will help you to develop a business plan, complete with plenty of budget advice.

Because of the abundance of potential lawsuits in the world today, I usually recommend a corporate form. If, after seeking professional advice, you decide to choose a form other than corporate (perhaps because of the cost of corporations), be sure you have included a review of your personal debt exposure.

In general, never rush into a decision about your debt or business form. No “expert” who gives you business advice without understanding your possible personal liabilities is doing his or her job. If you have the enthusiasm and drive to start a business, you owe it to yourself to do it right.

Continue to Part 2