Filing for Bankruptcy on behalf of your business is a difficult decision. The last thing you want is for your business's financial struggles to affect your personal financial well-being. The good news is that a corporate Bankruptcy does not mean that you have personally filed so it will not show up on your personal credit report.

What is personal liability?

Personal liability refers to the extent that you are responsible for your company’s debts and obligations. Different business structures and decisions lead to different levels of personal liability. Simply being a shareholder of that company does not make you personally liable for the debts of the company. Here are three things to consider when looking at your personal liability.

1.   Personal guarantees

If you signed any personal guarantees of a debt, you will be personally liable in the event of your business filing for Bankruptcy. A personal guarantee means that you made a legal commitment to take personal responsibility for the repayment of a business debt or obligation. This guarantee means that if the business cannot pay the debt or fulfill the obligation, you are basically agreeing that you will be personally liable for the debt if the creditor chooses to call on that guarantee.

It should be noted that some provinces, such as Alberta, can have rules on what makes a personal guarantee valid.  You may wish to seek legal advice before you sign a guarantee, or if a creditor is calling on the guarantee you signed.

Personal guarantees are common for things like business loans, leases, or other credit where the finances of the business aren’t strong enough to justify the loan on their own and need the strengthening of your personal credit rating, assets, or income. This provides additional security to the lender or creditor but at the expense of your own personal risk. 

If your business files for Bankruptcy, creditors can pursue you personally for the debt if you signed that guarantee.  An assessment would have to be done to determine if any of your personal income or assets are then at risk.

2.   Director of the corporation

Being the director of a corporation doesn’t automatically make you personally liable for any outstanding debts from the business Bankruptcy. The point of the corporate or limited liability structure is to protect you from that kind of personal liability. There are still certain circumstances where a director can be held personally liable, such as breaking any fiduciary duties, engaging in fraudulent activity, or making decisions that harm the company overall. A director can also be personally responsible for unpaid wages, unpaid GST, or payroll remittances, and you may be exposed to corporate income taxes if you were collecting dividends or took property from your company.

In extreme cases of fraud or illegal activity, a legal proceeding in court could overcome the limited liability protection, increasing your risk of personal liability. Assuming you haven’t engaged in any fraudulent activity, your exposure as a director should be limited to outstanding items like employee wages and certain CRA debt.

3.   Business structure

The type of business structure your company has will factor into the extent of personal consequences. Different structures have different levels of separation between your personal and professional finances.

Sole proprietorship

This structure has a single owner who is responsible for the business. There is no legal separation between the owner and their company. Personal and business assets and debts are indistinguishable. If a sole proprietorship files for Bankruptcy, it is the person filing that Bankruptcy.  There is unlimited personal liability to the owner and their assets including their home, personal accounts, and property.  Keep in mind though, that there are federal and provincial exemptions that can protect personal assets even in a Bankruptcy.

General partnership

A general partnership involves two or more individuals who agree to run a company together. Even though there is more than one owner, just like a sole proprietorship, there is no separation between the partners and the business. A Bankruptcy in a general partnership will affect the personal finances of all partners.  The partnership assets will pay off the partnership debts first, and any surplus would then fall to the individual debts.

Limited liability partnership (“LLP”)

An LLP is a Partnership structure whereby each partner has limited personal liability for the partnership debts.  For example, accounting and law firms are quite often structured this way.  The individual accountant isn’t personally liable for any partnership debts unless personal guarantees or co-signing obligations were signed. 

Corporation

A legal corporation has a layer of protection between business and personal finances. Corporate debts and assets are separate from personal debts and assets. In the event a corporation files for Bankruptcy, the business assets are used to settle any remaining corporate debts.

Working with a Licensed Insolvency Trustee

Navigating Bankruptcy for any business is a challenging enough undertaking as it is. It’s not a situation any person or company wants to find themselves in. Fortunately, a Licensed Insolvency Trustee can help guide you through the process, specifically how much personal liability you may have.

Decision-making — To begin with, a Licensed Insolvency Trustee can help you decide if Bankruptcy is the right call. Restructuring, liquidation, or Proposal may also be viable options.  Sometimes, the business just needs to be properly wound down, and the Licensed Insolvency Trustee will then help guide you with any personal exposure.

Filing for Corporate Bankruptcy— If Bankruptcy makes the most sense, your Trustee will file the appropriate paperwork and begin the process.

Liaison with creditors — If you have notable debts and creditors, your Trustee will review how to communicate with those creditors and take over those calls if you have filed a Bankruptcy.

Understanding personal liability — Finally, your Trustee will explain the extent of your personal liability and any implications, exemptions, or strategies you can take on your journey to financial well-being.

Put yourself on the journey to financial well-being

If your company does have to file for Bankruptcy, don’t worry, this will ultimately just be a step on your overall journey to full financial freedom. The key is to understand your options and risks at every stage of the process. Your personal and business finances are both part of your overall health and can overlap in several ways. Expert guidance and advice are invaluable as you navigate the complexity of the financial landscape. Consult a Licensed Insolvency Trustee for any questions you may have about both your business and personal finances.