I have a question re: tentative changes to bankruptcy law and new business

[Willy Lee]

This may not be the best time to do this, but my S.O. and I are in the process of getting a loan to start a new business. While everyone else is doing their best to pay down their debt, we are running our up. Living the entrepreneurial dream, right? So we are hoping to borrow 50k from the bank, use up our credit line (10 k) on our 1 credit card (we only have 1 and it is a business card), and realistically we will max out a 20k second on our home to get the business (an artisan bakery) up and running.

I am wildly optimistic that the business will be a huge success. But yeah, there are no guarantees and we could totally fail.

If we incorporate the business (as an S-corp or LLC) will this offer us any protection if the business goes belly-up?

What is the worst case scenario if we fail?

Thanks for your help-
WL

[AllegroRondo]

1. You may want to check with a business lawyer

but I believe if you go as an S-corp, you can only lose your initial investment. Any personal assets (like your house) are safe, unless you put them as collateral for a loan.

[Willy Lee]

2. Thank you AllegroRondo

Me thinks an appointment with a lawyer is in order.

[madmark]

3. You should consult with local counsel, but I will comment generally

that its hard to believe that banks or CC issuers would extend credit to a new start up entity without a personal guaranty from principles and if there is such a guaranty the form of the entity conducting business does not eliminate the principles' liability. Small business entrepreneurial failure is a common bankruptcy cause and most of those people will be substantially harmed by the bankruptcy bill.

[Willy Lee]

4. That took a couple of reads for me to grasp, but I think I understand.

Tell me if I have interpreted correctly...

A personal guarantee from principles means that my S.O. and I offer some personal guarantee that we will repay the loan (ie our home as collateral).

If the guarantee is there then regardless of our business structure (S-corp, LLC, or sole proprietor) we run the risk of losing our personal property because of our personal guarantee.

Is that correct?

Thanks for your patience with someone lacking legal finesse- but damn, I'm one hellofa pastry chick!!

WL

[madmark]

5. Guarantees can be secured by collateral (ie property) or they

can be unsecured. Either way its a personal obligation to repay the business' debt.

[ooglymoogly]

6. the key is to not sign personally for the loan

nor cross collateralize anything, nor put anything you can't lose as collateral, because you will lose everything outside these parameters under bankruptcy. if you have a good enough business plan and a good past history, you should be able to get the money on the merits without pledging your personal assets. look into grants for starting a business and keep your business and personal assets separate.

[Willy Lee]

7. Thanks. That is great advice. nt

[amazona]

8. worst case you lose everything

In the other thread, as I said, my friend had to declare personal as well as business bankruptcy.

This is because if your business is not making money, you are not getting paid, and yet you still have to eat.

An LLC provides you some great protections, for instance against someone suing your business and getting your home, it can't happen with an LLC...but an LLC cannot protect you from the need to regularly eat food and sleep in a secure place. If you have no income, you will be charging food from the grocery store or eating a lot of stale bread, I guarantee it!

$80K in debt for an artisan bakery in a world gone mad? What happens to your business if there is another downturn or terrorist attack and people go back to buying Bunny Bread? How many restaurants do you have lined up to buy your goods every day? How late do they pay? How long have they been in business, and how often do they switch suppliers? I don't need or want an answer, I'm just sayin' that the worst case is not some rare event that occasionally happens. It is the usual case, since most new businesses fail.

Personally, I wouldn't do it, but it's your life and ultimately your money. Good Luck!!!

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