Stories We Tell Ourselves: The Business Credit Card

Business owners may be inseparable from their businesses, but they still want to  believe the business debts are not their own.

Business credit card is an oxymoron in the world of small business.  The card may be marketed for use in your business, it may be touted as an attribute of your-life-in-business, but at the end of the day, it’s a personal debt.

Most likely, even if the business is a separate legal entity distinct from the business owner,  the entity is not liable on the card at all.  The only connection to the business is the embossed  business name under the owner’s name.   How does this come to be?

Business as separate legal person

A sole proprietorship business is indistinguishable from the person who owns the business.  The profit seeking activities of the owner are just another aspect of the individual’s finances.  In this case, the business really is the owner.  In law, then, there is no line drawn between the owner and  her business.

Business as legal entity

Corporations and LLC’s are persons in the eyes of the law.  They exist independent of the lives of the people who own them.  If the corporation owns the business, business operations can operate long after the individual who once owned the stock has died or sold her shares.  As a separate entity, a corporation can borrow money and enter into other contracts that are not the debts of the shareholders, even if there is only one shareholder.

Small corporations seldom credit worthy

The need for credit tangles the corporation and the shareholder together again, because most small corporations are too new, too small, or too risky for any lender (and a credit card issuer is nothing other than a lender) to make a loan without the joinder of an individual.  That individual will be liable for the debt whether or not the corporation can pay, or when the corporation ceases to exist.

Issuer just skips a step

In practice, however, the credit card issuer often doesn’t even ask for the promise of the corporation to pay the card balance.  If there is a default, the issuer expects to collect from the individual.  The individual will live on even if the business dies.

The issuer is content to tout the business use and the business utility of a “business card”,  hoping to bypass any reluctance on the part of the business owner to incur more debt.  It’s on a business card, the owner thinks, as though that made her less liable.

It is a comforting bedtime story, until the rude awakening.

Image courtesy of Andres Ruedas.



Category: Life After Debt

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Article by: Cathy Moran

Cathy is a lawyer in Northern California, where she's run her own small firm for over 30 years. A certified consumer bankruptcy specialist, Cathy pioneered the use of the Internet as a means of educating people about their debt relief options. Her clients have educated her about money.