Wednesday, October 22, 2008

Is My Wife Responsible for My Debt Under a Sole Proprietorship?

A sole proprietorship is the easiest form of business to create and also the most risky. This business type offers no protection for personal assets in the event the company fails and cannot pay its bills. Even the spouse of a sole proprietorship owner may lose money or real property as creditors attempt to seize assets to satisfy business debts.

No Limited Liability

    A sole proprietorship does not benefit from limited liability protection like a corporation or limited liability company. A business creditor may attempt to seize or place a lien on any of your personal assets, including real property like a home or automobile, regardless of whether or not your wife's name also appears on the title or deed. This means your wife is effectively responsible for the debts of your sole proprietorship, because assets she holds in common with you are on the line if your business fails to pay its creditors.

Non-Marital Assets

    Business creditors may not pursue your wife's assets for your sole proprietorship's debts if these assets are not in your name. The state you live in may also require your wife to have possession of these assets prior to the marriage to make them immune to the collection actions of business creditors. If a creditor can make the claim that you are in control of the assets or finances in question, regardless of the name on the deeds or titles, these assets may be in jeopardy if a business creditor obtains a judgment against you.

Qualified Joint Venture

    A qualified joint venture is a sole proprietorship where you and your spouse participate equally in the material operation of the company. You must file a joint tax return and the federal government considers each spouse a sole proprietor for tax and debt collection purposes. A qualified joint venture also opens all of your wife's marital and non-marital assets to collection practices if the business fails to meet its financial obligations. Only enter into a qualified joint venture if your business is successful and sustaining steady growth.

Community Property States

    Ten states across the country, including California, Texas, Wisconsin and Louisiana, are community property states for marital assets and debts. This means you and your spouse are equally responsible for all debts accumulated over the course of the marriage. In these states, business creditors of your sole proprietorship may move to seize your spouse's assets for the satisfaction of business debts. Your spouse may retain equal obligation to pay these debts even if you divorce.

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