Because of the internet and widespread educational campaigns by the government and the business communities, most consumers are pretty savvy when it comes to credit ratings these days. Almost everyone knows that the debts we have, specifically the kind of debt and their status, and our ability to borrow further have a symbiotic relationship. For most people this relationship is clear and straightforward - not paying your debts affect your credit rating negatively and vice versa. However, things can get a little cloudy for folks who operate a small incorporated business that is failing. Although incorporating your business means that it stays separate from your personal finances, some of the business transactions you have [done] may still be tied to your personal credit rating.
To determine if your business' failure could affect your credit score, you need answer this simple question: Have you personally guaranteed your company's debts? If so, then your company's failure will likely affect your credit rating. Business owners unwittingly guarantee their company's debts through many ways but here are the three main ways:
1. Through Written Communication
You become personally responsible for your company's debts if you communicate a personal guarantee to a vendor or other claimant through writing. Although most business owners are smart enough to avoid this, they may still get into trouble especially if they slip up in a casual email.
2. Through Your Social Security Number
If your own SSN is used in opening a business credit card or other accounts, those debts become your personal liability. To verify this, ask your bank to look up your credit card account using your SSN. If they find it using your SSN, you are indeed personally liable.
3. Through Your Business' Contracts With Credit Provides
When opening a business account, some credit card contracts include a clause stating that regardless of the use or purpose of the card - meaning that even if it's a company card opened without your SSN - you are still personally liable. To find out, read your company card's credit agreement.
When closing down a failed business, there are still some best practices whether you are personally liable for its debts or not. Even if you have no plans to pay your debts to vendors, returning unsold inventory to them demonstrates good faith and might even slightly reduce your debts. Another practice that helps is being up-front with all vendors and other creditors because hiding your intent to close down the business could complicate your debt situation, especially when dealing with them in the future.
Having expert advice when incorporating and signing up for credit cards or lines of credit not only expedites the process but also protects you from obtaining business debts that are tied to your personal finances.