Balancing Personal Finances & Business Challenges

In this article, you will discover:

• The pervasiveness of business owners who use personal credit cards to finance their businesses.
• The advantages, drawbacks, and risks of using personal funds to support a failing business.
• Potential complications arising from using personal credit cards for business expenses
• Reasons sole proprietorships should avoid filing for bankruptcy.

How Common Is It For Business Owners To Finance A New Company Or Keep It Going With Their Own Personal Credit Cards?

It is quite common for business owners to finance their new company or keep their failing company going with their own personal credit cards. When businesses face financial troubles, business owners often use their own funds to keep the business afloat. In some cases, they turn to the trust funds taxes that they collect from their employees through the latter’s withholdings or from collected sales tax; all to generate cash flow to pay creditors. After all, during the operation of a financially struggling business, no one from the government is on-site to insure that collected taxes and withholdings are paid to the appropriate authorities and, as such, such funds tend to become “cash flow enhancers.” Of course, in the case of unpaid trust fund taxes, the business can and will probably be personally liable for collecting but not turning over those trust fund funds.

These issues are especially common since many troubled businesses operate on a cash-on-delivery (COD) basis. However, actions like this often only cause more harm than good and can potentially result in severe repercussions to the business owner for years to come.

What Are The Advantages And Drawbacks Of Using Personal Credit Cards To Keep A Failing Business Going?

The main advantage of using personal credit cards to keep a failing business going is that it provides immediate cash flow. However, the problem with this approach is that individuals often keep shoveling money into a failing business, hoping for a turnaround, and that turnaround never arriving. The owner of a financial struggling business needs to do a thorough analysis of the business’s prospects before throwing more money into the mix.

This practice can result in individuals accumulating more debt and becoming personally liable for the corporation’s debt. As such, it is essential to realize the consequences of using personal credit cards for business purposes and to make informed decisions before it’s too late.

How Many New Businesses Fail, And Why Is It Risky To Use Personal Funds To Keep Them Going?

It is a considerable gamble to start a new business right now, especially with the number of businesses that fail. Many new restaurants and retail stores are not doing well, and even businesses that thrived during COVID-19 appear to be having problems surviving in a post-pandemic world.

Whenever individuals put their personal funds into a business, they are at risk of losing these funds. In the event of business failure, individuals may have to deal with the debt accumulated from personal credit cards, lines of credit, or loans from friends and family. This makes it essential to assess the risks before making any decisions, especially if filing for bankruptcy becomes necessary.

What Are The Complications That May Arise From Using Personal Credit Cards For Business Expenses?

One potential complication that may arise from using personal funds for business expenses is that the action could trigger an IRS audit. The meaning of a business expense is vague, and people may overestimate what qualifies as a business expense. Additionally, using personal expenses for your business draws your personal finances into the business. As a result, filing for bankruptcy can become incredibly complicated and may involve the means test, which determines whether an individual is eligible for Chapter 7 or Chapter 13 bankruptcy. What’s more, the total household income is a factor in the means test, making it essential to consider household income and expenses when filing for bankruptcy.

Should Sole Proprietorships File for Bankruptcy? What Is The Difference Between Chapter 7 Business Bankruptcy And Chapter 7 Personal Bankruptcy?

In my opinion, sole proprietorships should avoid filing for bankruptcy because equity cannot be distinguished between personal and business assets. I do not recommend filing bankruptcy corporations because they do not receive discharges in Chapter 7 bankruptcies and, when dealing with closely held corporation, the line between the business and the principals often blurs with untoward consequences. Instead, my recommended approach for these corporations is an assignment for the benefit of creditors, which is a state remedy to liquidate a business. It is less intrusive, quicker and has more options for the disposition of the assets of the corporation having made the assignment for the benefit of creditors.

With the guidance of a skilled attorney for Bankruptcy Law, you can have the peace of mind that comes with knowing that we’ll make it look easy. For more information on Bankruptcy Cases in Massachusetts, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (978) 922-8440 today.