Finance Report: Bankruptcy Effects on Business Owners and Guarantees

This finance report delves into the critical issue of business bankruptcy, examining its profound effects on various business structures, specifically sole proprietorships and Limited Liability Companies (LLCs). It highlights the increasing instances of business failures, particularly in the United States, and analyzes the underlying causes. The report contrasts the liability implications for owners in sole proprietorships, where personal assets are often at risk, with the more nuanced risk distribution in LLCs. Furthermore, it addresses the impact of personal loan guarantees, emphasizing how banks can seize personal assets to recover debts, irrespective of the business structure. The report references academic sources to support its analysis, providing a comprehensive overview of the financial risks and liabilities associated with business ownership in the context of bankruptcy and loan agreements.

Running head: FINANCE
Finance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................4
References........................................................................................................................................5

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Answer to Question 1
In today’s business organizations, bankruptcy is considered as one of the major form of
business failure. Bankruptcy refers to a particular process that allows the consumers or the
businesses to repay their debts. In the recent years, it can be seen that the number of bankruptcy
of businesses in United States has increased massively (Biddle, Ma & Song, 2016). However,
there is a particular reason for the bankruptcy of so many businesses irrespective of the types of
their industry. There are many instances of bankruptcy for the sole proprietorship business in
United States. Sole proprietorship refers to particular type of business where the owner of the
business is a natural person and there is not any legal distinction between the owner and the
business entity. Hence, the process of bankruptcy has some major negative impacts on the
business of sole proprietorship. In case of a sole proprietorship business, there is not any legal
distinction between the owners of a sole proprietorship business and the business entity
(Telipenko & Zakharova, 2014). In most of the cases of the bankruptcy of sole proprietorship
business, it has been seen that the owners of sole proprietorship entities file their personal
bankruptcy at the same time of the bankruptcy. The main reason behind the filing of personal
bankruptcy is to save their personal properties like house, cars and others to pay the debts of the
creditors of their businesses. Most of the time of establishment of the business of sole
proprietorship, the owners are misguided by informed that their personal assets will not be
liquidated or touched to pay the debts of the creditors in case of bankruptcy. However, in actual,
it does not happen in most of the ccases as the authority has the right to sell the owner’s personal
assets like home, cars or others to repay the amounts of the creditors at the time of bankruptcy.
This is the major effect of the bankruptcy of the business of sole proprietorship on their owners.
This happens due to the reluctance of the owners of sole proprietorship businesses to take

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precautions to avoid bankruptcy. Even, it has been seen that most of the owners of sole
proprietorship business do not ask the necessary questions about bankruptcy to their solicitors. In
this way, bankruptcy affects the owners of sole proprietorship business.
Answer to Question 2
Limited Liability Company (LLC) refers to a specific type of private limited company
that can only be seen in United States of America. On a more specific note, in the business
structure of LLC, the combination of limited liability protection and flexible tax structure can be
seen. LLC are called as ‘hybrid’ entity as this particular type of business has the features of both
corporations and partnership business. In this context, it is crucial to mention the fact that in the
business of LLC, the owners have to bear limited amount of liabilities of their business (Welch et
al., 2016).
The earlier part of the study shows the negative effect of bankruptcy on the owners of
sole proprietorship business. There are differences between the features of the business of LLC
and sole proprietorship. For this reason, bankruptcy has some different effects on the owners of
sole proprietorship. In case of sole proprietorship business, the amount of risk is higher as the
owners alone have to take the responsibility of all the debts of sole proprietorship (Lennox & Li,
2012). However, in case of LLC, the amount of risk is lower than sole proprietorship. In the LLC
business model, more than one partner is needed to form the business entity. Thus, the structure
or the model of LLC can save one partner from the liabilities of another partner in the business.
Hence, in the business model of LLC, all the partners are required to bear the portions of the risk
of bankruptcy based on some predetermined parameters. It implies that the partners of LLC have
to take the responsibility of their part of business debts and liabilities; but it does not mean that

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the personal properties of the owners of LLC are safe at the time of bankruptcy of the business.
There are many instances where the owners of LLC have to put their personal asset like house,
cars and others on stake to repay the debts of business creditors. These are the main differences
between the bankruptcy effect on LLC and sole proprietorship business.
Answer to Question 3
From the above analysis, it can be seen that bankruptcy has major negative effects on the
owners of all kind of businesses irrespective of sole proprietorship or LLC or partnership. The
guarantee of personal loans also has some major effects on the owners of sole proprietorship,
partnership, LLC and others. In today’s time of economic recession, banks provide loans to the
companies based on some guarantee. There are many instances where banks enter into loan
agreements with the limited-liability or partnership companies by using the personal assets of the
owners as guarantee. The same concept is applicable for the business model of sole
proprietorship (Lennox & Li, 2012). For the sole proprietorship businesses, banks provide loans
by using the personal assets of the owners as guarantee. As there is only one owner in sole
proprietorship, he/she solely has to provide guarantee for bank loans. For the LLC companies, in
case the loan is taken in the name of the business, then all partners of the company is equally
liable for the loans. It implies that in case the company become bankrupt and cannot afford to
pay the loan, the banks have the legal right to sell the personal assets of the owners to recover the
loan amount. Thus, based on the above discussion, it can be observed that the banks or the
financial lending institutions have the right to take the personal assets of the owners of
businesses to recover the loan amount.

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References
Biddle, G. C., Ma, M. L., & Song, F. M. (2016). Accounting conservatism and bankruptcy risk.
Lennox, C., & Li, B. (2012). The consequences of protecting audit partners’ personal assets from
the threat of liability. Journal of Accounting and Economics, 54(2), 154-173.
Telipenko, E., & Zakharova, A. (2014). Bankruptcy risk management of a machine builder.
In Applied Mechanics and Materials (Vol. 682, pp. 617-622). Trans Tech Publications.
Welch, E. P., Saunders, R. S., Land, A. L., Turezyn, A. J., & Voss, J. C. (2016). Folk on the
Delaware General Corporation Law: Fundamentals. Wolters Kluwer Law & Business.