Commenter Toxic Roach asks, in re bankruptcy:
But then why not use a LLC business organization? That would protect the owner from the unsecured debts of the business, would it not?
So is it really a question of how bankruptcy law informs peoples business organization decision?
This goes back to what I was saying earlier about supply and demand. Anything that makes it easier for consumers to discharge unsecured debts will decrease the supply of credit, while increasing the demand for it; anything that makes bankruptcy more difficult will increase the supply, but depress the demand. The empirical question for economists is which effect dominates.
In this case, that level of liability shielding effective shuts off the supply of credit. No bank will lend money to a brand new LLC unless the founder has a pretty serious track record, and some pretty serious assets in the corporation. As a result, new entrepreneurs without massive sums of capital have two options: find an "angel", or use their personal credit to secure business loans. This can take many forms, from a personal guarantee on a business loan, to "Bridge financing by MasterCard". But unless they've got deep pockets, almost all of them resort to some form of personal finance. And that means that if the business fails, they are personally liable for its debts.
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