New business shouldn't inherit partner's old debt


Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question Dear Your Business Credit,
A guy I'm going in partnership with has an S corporation. I have a business license. We were thinking about forming a limited liability corporation (LLC) together, with a new name. Would I inherit his debts from his S corporation? -- Dwayne

Answer Dear Dwayne,
I wish more entrepreneurs would ask questions like yours. The best time to find out the answers is before you're legally joined at the hip.

To answer your question, it looks like you would not inherit those debts. But you should still get advice from a lawyer before signing any paperwork with your partner so you can be certain.

I ran your question past Leslie Tayne, an attorney in Melville, New York, who advises small-business owners on credit-related matters. "No, you would not be responsible for debts from his S corporation, unless you assume those debts when you form the LLC," she said in an email. But she noted that she had limited information on your situation and answered based on what she knew of it.

Inheriting your partner's debt should not be your only concern in this situation. I'm assuming you have already done some due diligence on your potential partner, given that you know about his debts -- or have a candid relationship and he brought them up. Still, even if he is a good friend, I would suggest you hire an attorney to do routine due diligence on him, if you can.

I'd be very curious about what led to the debt at his previous S-corp and what kind of debt it was. Was he investing in growth and borrowing from a bank at a low interest rate -- or turning to hard-money lenders in desperation because he couldn't make payroll? An attorney will ask the probing questions you really need to address, but might feel awkward asking.

I'd also want to find out exactly how your potential partner is handling his debt from the S-corp. Is he paying it back in an honest, upfront way, struggling to make minimum payments or actively dodging it? You need to understand his financial situation and past behavior to judge whether he will be a good partner for you.

If, for instance, he has damaged his credit severely, that will affect your LLC's access to credit. Lenders often look at small-business borrowers' personal credit in a startup or very small firm, because the business won't have much of a credit history. If your partner can't realistically get a bank loan or other credit with you, you will probably need to do the borrowing and put your own credit on the line. If that's the case, you need to figure out if you're ready to play that role.

Partnerships can be a great way to expand your capabilities as a business owner. But it's very important to ask the tough questions early. In the best teams I've seen, the partners are extremely direct with each other and bring difficult issues to the surface early. I think you're on the right track with this, but you need to keep going and dig until you know the full story.

See related: Payments made out to your LLC are harder to garnish, Am I liable for business debt my partner hid?, Financing equipment when partners' credit profiles differ

Meet's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday,'s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: March 23, 2015

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Follow Us

Updated: 10-24-2016

Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.