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PDtax
PDtax, CPA, MBA
Category: Finance
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Experience:  Tax professional and business consultant for 32 years.
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Do i owe money personally to the investor if my company receive

Resolved Question:

Do i owe money personally to the investor if my company receive a convertible debts from them and the company is failed (bankrupt) ?
Submitted: 1 year ago.
Category: Finance
Expert:  PDtax replied 1 year ago.

PDtax :

Welcome to the site. I'm PDtax, and will be helping you today.

PDtax :

You only owe as a guarantor for a business loan if you agreed to guarantee the debt. A review of the loan documents will indicate whether you are personally liable or not.

PDtax :

Good morning.

Customer:

Morning

Customer:

Thanks for your quick response

Customer:

but can you explain with simple language ? sorry for that

PDtax :

When a company borrows money, it may be the debtor alone. If you own the business, you are not personally liable unless you guarantee the debt.

PDtax :

An example: You own Joe's small engine repair, Inc. The corporation buys repair parts on credit, and can't repay the loan from the supplier. Unless you guaranteed the debt, the corporation owes , not you.

Customer:

so what you mean, is convertible debt is about the same with a bank loan, right ? as long the company form is LLC or corp or inc, the individual will not liable

PDtax :

The key is an incorporated entity, a separate entity. That corporation can borrow money on its own.

PDtax :

So an investor bought convertible debt of your company, and the company failed. The company is likely an LLC or corporation, so you aren't liable unless you personally guaranteed, which is not done in these situations.

Customer:

but what i read about convertible debt is slightly different with what you explain. As for my understanding, convertible debt is not really a debt - but a money comitmment from investor. They expect to get high valuation from a seed company. From this, im a little confuse. IF the company failed, what is my obligation to them

Expert:  PDtax replied 1 year ago.
we got switched to Q & A...

"but what i read about convertible debt is slightly different with what you explain. As for my understanding, convertible debt is not really a debt - but a money commitment from investor. They expect to get high valuation from a seed company. From this, im a little confuse. IF the company failed, what is my obligation to them"

Expert...You don't have a personal obligation. The company failed, so their investment is lost. Personal guarantees are almost never used in these financings, so I am comfortable saying you are not liable. A review of your debt offering will confirm.
Customer: replied 1 year ago.

OK Last question,


 


By law, the LLC owner (the company owner) will not liable of any debt, i can understand that.


 


But, if it happens, the company is "in debt" with all of those investor who do the convertible debt, right ?

Expert:  PDtax replied 1 year ago.
The company issued convertible debt. It's an LLC, and the entity failed. Those debts are considered debt until they are converted to equity. They are not considered personal debts of the owners unless you guaranteed them, which is unlikely.

Thanks again from Just Answer.
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 2181
Experience: Tax professional and business consultant for 32 years.
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