While opening an LLC does absolve entrepreneurs from some liability, it doesn’t mean business debts get wiped away with the closing of the business.
Dear Your Business Credit,
If I close down my LLC but have credit card balances, do I have to pay those balances?
If I do not pay, can that affect my personal credit report or does it fall on the “company’s” liability? Remember, the company is no longer active. – David
I wish I could tell you that closing the business would wipe the slate clean, but that’s not true.
Closing a business does not absolve you of the responsibility to pay down outstanding credit card balances.
See related: What happens to my credit accounts after selling my business?
Credit obligations after a business closes
Here’s why: If you borrowed the money on a personal credit card that you guaranteed, then you are legally obligated to honor that guarantee.
And if you used a small business credit card to borrow the money, you very likely gave a personal guarantee for that card, also, meaning you have the same obligation.
For some business credit cards, there is “joint and several” liability where both you and the business guarantee the debt. However, in those cases the lender can come after both you and the business to pay the balance, so this type of liability doesn’t offer protection from paying your credit card bills, either.
The bottom line is that it doesn’t really matter if the business is closed and no longer active. You still will owe lenders whatever you borrowed, and they can come after you for it.
If you look at it from their point of view, why would they lend money to any small business if a business owner could wipe away all debts by simply closing up shop? They would lose a lot of money that way.
How to deal with debt following business closure
What if the debts are too substantial for you to pay in this lifetime?
In that case, I’d recommend speaking with an attorney who specializes in debt and bankruptcy, who will be able to review your options with you.
No one wants to file for bankruptcy protection, but in some cases, it’s better to get a fresh start than to live with crushing debt for years on end.
You aren’t the first entrepreneur to wonder if closing an LLC will be a way out of debt.
Forming an LLC gives entrepreneurs some protection from liability, in that it shields their personal assets if someone sues them. However, it doesn’t offer protection from paying business debts.
Your letter is a good reminder of why it’s important to be very careful about how much you borrow to finance business growth.
Entrepreneurs tend to be natural optimists, but unexpected things happen all the time that can derail a business or cut into your income.
These may be events that have nothing to do with a business, like a health situation that keeps you from working. You will still have to stay current on your credit card bills if that happens.
How to limit your business’s credit liability
A good rule of thumb, if you’re starting a business, is to limit your business borrowing to a total that you can reasonably pay off – with your personal assets. You may have to tap into your personal money to do that at some point.
In your case, you’ve already racked up the debts, so the only thing to do is more forward and come up with a plan to pay them.
Making sure you have some income coming in as you close the business, whether through a traditional job or gig work, is an important first step. That’ll make it a lot easier to pay down the balances.