Whether a business bankruptcy will affect your personal credit depends on whether you are personally liable for the business debt under the law. This depends on: 

• the type of business entity you used for your business
• whether you personally guaranteed the debts of the business, and
• if the business owes taxes, the type of taxes owed.

Read on to learn more about each of these factors.

Type of Business Entity and Your Personal Credit 

The type of business entity you used to conduct your business determines your general responsibility for the business debts.  

Sole Proprietorship

If you did business as sole proprietor, you are personally responsible for all of the business debts.  Under the law, you and the business are the same. You own the business assets personally and are personally responsible for all of the business debtor. In order to discharge or wipe out the business debts, you would have to file a personal bankruptcy. This will affect your credit and will show up on your credit report for up to ten years.

General Partnership

If you operate your business as a partnership and you are a general partner, you are personally responsible for all of the business debts along with the partnership. The business assets are owned by the partnership and a partnership can file for bankruptcy in its own right. But if all of the partnership debts are not paid from the liquidation of the partnership property, the general partner or partners remain responsible for the unpaid debt. The creditor can report these debts to the credit bureaus under your name. However, the fact that the business filed for bankruptcy should not be on your credit report since it was not a personal bankruptcy.

Limited Partnerships, Corporations and Limited Liability Companies

If you are a limited partner in a business or if you do business as a corporation or a limited liability company, under most circumstances, you are not legally responsible for business debts.  Each of these entities can file for bankruptcy in their own right and the business bankruptcy should not effect your credit. With limited exceptions, neither the business bankruptcy nor the business debts should show up on your credit report.

Exceptions: When an LLC, Corporation, or Limited Partnership Bankruptcy Might Affect Your Credit

In a few instances, your LLC, corporation, or limited partnership bankruptcy might affect your personal credit report.

Personal Guarantees

Often creditors will require the owners or officers of a small business to sign a personal guaranty before they will extend credit to the business. If you sign a personal guaranty, you are agreeing to be responsible for the payment of the business debt. Under this circumstance, if the business files for bankruptcy and the debt is not paid in full in the bankruptcy, you will need to pay the debt you guaranteed or it could be reported to the credit bureaus as an unpaid obligation. If it is, it will most certainly affect your credit.

Certain Types of Business Taxes

Certain types of business taxes, if unpaid, may also become your personal responsibility. Taxes that you withhold from employees' salaries or that you collect from others, such as sales taxes, are often referred to as trust fund taxes. Although it is the responsibility of the business to transmit these taxes to the government, the money that is being used to pay the tax belonged to the employee or the customer. You are charged with personal responsibility if you collect these taxes and do not transmit them to the taxing authority. This debt will affect your credit, especially if a tax lien is filed against you and recorded in the public records.