When a business takes on a large amount of debt and becomes delinquent in its repayment, creditors will often file suit in court seeking repayment. While the creditor will usually seek payment from the business, if the business is unable or unwilling to pay, the creditor may file suit against the business' owner and collect from his personal assets. Whether a creditor can legally do this depends on the structure of the business and how the debt was secured.
Sole Proprietorships and Partnerships
If a business is structured as a sole proprietorship, meaning it is owned and operated by a single person, then the owner is securely tied to the debts of his business. A legal judgment against the business is, in effect, a judgment against the individual himself and creditors are allowed to treat the individual's assets as they would the business'. Similarly, partners in a partnership are liable for all business debt, although they share this liability.
Corporations
Owners of corporations, as well as owners of limited liability partnerships (LLPs) and limited liability companies (LLCs), generally cannot be personally sued for debts incurred by the company. For example, the shareholders and top management of Ford Motor Company, a corporation, cannot be sued by creditors for the company's outstanding debts. However, if an owner of a corporation, LLC or LLP personally secured or guaranteed payment of the debt, then the owner may be sued and his personal assets seized.
Debt Securement
According to Yahoo! Finance, many businesses, particularly small businesses, do not have good enough credit ratings that they can receive loans at reasonable rates. To receive these loans, a business' owner must personally vouch for the loan, taking it out in his name or agreeing to secure it with his own collateral. In such a case, if the loan defaults, creditors can go after the owner's assets, as the loan is essentially his.
Collection
Generally, before a creditor can go after the personal assets of a business owner, he will attempt to extract payment from the business itself, regardless of who underwrote the loan. It is only when the business does not pay that the creditor will file suit against an individual. To seize personal assets, a creditor can resort to a number of different practices, including wage garnishment, bank account freezing and the levying of liens against personal property.
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