Is Your Spouse Liable for Your Business Debts?
Whether your spouse is liable for your business debts depends on how your business is organized and how the debt was incurred.
Whether your spouse is liable for your business debts depends on how your business is organized and how the debt was incurred. Further, where you live (in a common law or community property state) can also affect if he or she can be held liable. Read on to learn more about when your spouse may be personally liable for your business debts.
When You or Your Spouse May Be Liable for Business Debts
You or your spouse may be personally responsible for your business debts under the following circumstances:
Your Business Structure Does Not Offer Limited Liability
If you are a sole proprietor or a general partner of a partnership, you have unlimited personal liability for the obligations of your business. Your spouse would be liable for the business's debts in the same way that she or he would be liable for personal debts. For example, if you and your wife owned the business as a general partnership, both of you will be on the hook for its debts.
However, if you are a limited partner or your business was formed as a corporation or a limited liability company (LLC), you are generally not personally responsible for business debts.
You or Your Spouse Cosigned or Guaranteed the Business Debt
One of the most common ways to make yourself personally liable for a business debt is to cosign or personally guarantee it. Regardless of whether your business provides limited liability, if you or your spouse cosigned the loan documents as a borrower or executed a guarantee you are responsible to pay that debt back if the company cannot.
However, even if only you cosigned a business debt your spouse can still be held liable depending on if you live in a common law or community property state. Below, we discuss these differences in more detail.
Common Law States
The majority of states follow the common law rules of property division. In these states, the general rule is you are only liable for a debt if you signed the loan documents, your name appears on the account, your credit information was used to obtain the loan, or it was for necessary items such as food and clothing for the family.
If your spouse incurred a business debt for his or her business, you are usually not liable for that debt unless you also cosigned or guaranteed it. However, if you jointly own the business as a general partnership, you are responsible for all its debts.
Community Property States
In community property states, almost all income and property acquired during the marriage is owned equally by both spouses even if only one spouse is on title. Similarly, most debts incurred during the marriage are deemed to be community debts regardless of who is on the loan documents. This means that if your spouse takes out a loan, community property (which you both own) can be used to satisfy that obligation.
If your spouse owns a business and he is personally liable for its debts, then your portion of the community property can be taken by creditors if he or she does not pay the debt. This essentially means that in a community property state, you may be automatically held liable for your spouse’s business debts if they are community debts.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Also, in Alaska married couples can choose to treat their property as community property.