Here are certain pros and cons, and legal implications you must consider before taking a business loan.
Have you decided to take a business loan in your wife’s name? While this may look exciting, you need to factor in the advantages and disadvantages in such cases. When The Wife Is A Guarantor: If the wife is not directly involved in the business then taking a business loan with her as a guarantor is beneficial but it has to be treated with caution.
a) “If the wife has no direct or indirect role in her husband’s business, then under the Married Women’s Property Act her assets could not be attached in case of loan recovery action by the lender. So that way the family can hold on to a few assets which are in the wife’s name in case the husband is unable to pay off the business loan,” Abhishek Kumar, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA), and founder, Chief Investment Advisor of SahajMoney, a financial planning firm said.
b) If a disputed asset is held jointly by the husband and wife then the lender has to return the wife’s portion of the asset after the liquidation of the asset.
a) “If a business is set up as a sole proprietorship or partnership then the assets of a wife could be attached in a loan recovery action by the lender. In the case of limited liability partnerships (LLPs), the assets of inactive partners cannot be attached to a loan recovery lawsuit,” Kumar added.
b) If in the future the wife no longer wants to be the guarantor for some reason then the borrower has to reach out to the bank with an alternate guarantor or additional collateral. However, the bank has the sole discretion in allowing or disallowing the switch.
c) Acting as a guarantor would reduce the wife's loan eligibility as she is considered on the same level as the borrower in terms of liability by the lender.
The legal implications of taking a business loan in your wife's name can vary depending on the specifics of the loan agreement and the jurisdiction in which you reside.
Personal Liability: “Your wide may be held personally liable for the debt, if the business loan is in your wife’s name. This could potentially impact her credit score and financial well-being,” Nihal Bhardwaj, Associate, SKV Law Offices added.
Co-Ownership Of Property: If you or your wife co-owns the property and the loan is taken out in her name, there could be specific legal requirements for how the loan is managed and repaid.
Joint Ownership Of The Business: Your wife may have the legal rights and responsibilities related to the business if she is a co-owner of the business. This includes her ability to make business decisions and her obligation to repay the loan.
Division Of Assets In Case Of Divorce: In case of your divorce from your wife, the separation of assets, which includes the business and associated debts, wherever there might be, will also be impacted by the fact that the loan is in her name.
Tax Implications: “There may be tax benefits or consequences associated with taking a business loan in your wife’s name, depending on the tax laws in your jurisdiction. It’s important to undertones how this decision could impact your tax obligations and benefits,” Bhardwaj said.
Preservation of Business Ownership: “Taking a business loan in your wife’s name can actually help you to take an ownership stake in the company. This would in fact help you to maintain full control without diluting your ownership percentage,” Kunal Sharma, Partner, Singhania & Co said.
Compartmentalized Credit Profiles: You could leverage your wife’s strong credit history, if applicable, and maintain a clear separation between your personal and business credit. This could actually safeguard your credit profile from potential business loan delinquencies.
Collateral Considerations: "Certain loans received in your spouse’s name may not necessitate collateral, based on the lending institution and loan type. This structure could help reduce the risk of personal assets being seized in the case of loan default," Sharma said.
Spousal Liability: In case your wife is the borrower and in case the business faces financial challenges, they assume the personal liability for the loan. And this in turn risks their personal assets in case of default.
Credit Score Impact: If there are late payments or defaults on the loan, it would negatively impact your wife’s credit score. This in turn could potentially impact their ability to get loans or credit in the future.
Ownership Ambiguity: “While you may retail operational control, the legal ownership of the loan rests with your spouse. This structure could lead to complicated situations such as business disputes, dissolution, or marital separation. It’s important to consult with a legal professional to set a clear ownership structure,” Sharma said.
Marital Stress: The burden of loan repayment might lead to discord and emotional strain within the marriage if the business faces financial challenges. It's important to maintain open communication and a mutual understanding of the risks and responsibilities involved.