Say I sell my house to fund my business, then my LLC flops and I have to declare bankruptcy. I still lost my house, no?
Now say I take a loan out for $70K to fund my LLC and it flops and I have to declare bankruptcy. Then do I get to keep my house?
What's the difference?
Situation 1: I have a house worth $250K. I sell it and use $100K to fund my business. My business flops; I'm out the $100K.
Situation 2: I keep my $250K house and get a loan from my bank for $100K. My business flops; creditors can't come after my house because I'm behind the LLC firewall, right?
Why would anyone ever choose situation 1?
Situation 3, you borrow money to start your business, it takes off, you pay it back and your business continues to grow. Later you are sued and lose a 10M lawsuit wiping out all of the assets in your business and then some. If you have a corporation your personal assets are normally protected from this loss. Alternatively your large and growing business is struck by a meteorite (which can come in many forms) that wipes out all of your assets but leaves you with the liabilities. If you are incorporated winding down the business normally doesn't affect your personal assets.
(I know you're not a lawyer, but am trying to get an impression for this). Say instead of $10M I get sued for $50K. In the $10M case I clearly can't pay that but in the $50K case, I might be able to sell my car, move into a cheaper house, etc, in order to pay it. Am I protected in both cases? What about $10K? At what point is it "OK, you can't pay this, go declare bankruptcy so you get to keep your personal assets"?
I think I need to hit the books...
It may be easier to visualize if you imagine there are several shareholders. Each would want it clear what were the company's assets and what were their personal assets (in addition to their share of the company).
Look at it this way, you buy 100 shares of GM which subsequently goes bankrupt. Your shares may be worthless but GM's creditors cannot come after you as a shareholder for more than the equity that you contributed (the money you paid for your now worthless shares).
If your business gets the loan, with no collateral, and no personal guarantee, then if the business goes bankrupt, the creditors can't come after personal assets! If you are lucky enough to find a bank willing to lend you 100,000 with no collateral, then go for it!