BUS202 Principles of Finance

What is your main take-away from this article? What did you learn the most? 

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 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.

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 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.

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.

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.