Employment Enterprise

Entrepreneur FAQ: Are My Personal Taxes Affected if My Business Fails?

If you are already a small business owner, or are contemplating starting a business of your own, this thought has probably crossed your mind.

Of course we don’t like to think about the possibility of failure – but it’s there, and it’s important to consider all potential outcomes.

Not all businesses are successful, and it’s important that as a business owner, you know the various possible situations you may find yourself in and how they may affect other aspects of your life.

And an important aspect of life in regards to running a business is money – in particular, your taxes.

Depending on the type of business you own, your business taxes will have varying effects on your personal taxes – both when successful and in the event of failure.

When Will My Business Failure Affect My Personal Taxes?

Of course, regardless of what type of business you own, it’s failure will undoubtedly affect your personal return – but the extent of that will vary greatly based on your businesses structure.

If You Are the Sole Proprietor of Your Business

If you are the sole proprietor of your business, there is no legal distinction between you personally, and your business – especially in terms of taxes. A sole proprietor ship does not exist as it’s own taxable entity.

In this case, you only file a personal tax return, with your businesses profit being reported as personal income.

As you can imagine, this means yes, your personal return will definitely be impacted – and greatly – in the event that your business fails.

If Your Business is a Limited Liability Company

While a limited liability company offers you some separation between the operation of your business and your personal assets, it will still have an effect on your personal income tax return. This is because profit earned through a limited liability company is reported as personal income.

The effect will be less than that of a failed sole proprietorship, but may still cause some problems.

If Your Business is Incorporated

The type of business that will have the least impact on your personal return is an incorporated one. This structure offers the most separation between your business and you as an individual entity.

With this type of business, you will file separate business taxes and personal taxes, with profits being filed on your business taxes rather than your personal, reducing the impact the businesses ups and downs will have on your own return.

Bonus: If You’ve Invested in Someone’s Else Business and it Fails

While it may seem similar, reporting profits and losses on your return, investing in someone else’s business will have different effects on your tax return than your own business would.

This is because the failure of someone else’s business will be treated as an investment loss, and may even qualify you for certain deductions, whereas the failure of your own business would not.

Get Some Expert Advice

While we have given you a quick run-through of the types of ways your business taxes may affect your personal taxes, it’s best to talk to an accountant that specializes in small business accounting and get an experts opinion.