Cengage Advantage Books: Business Law Today, The Essentials 11th Edition by Roger LeRoy Miller

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ADAPTING THE LAW TO THE ONLINE ENVIRONMENT
A Sole Proprietorship, Facebook Poker, and Bankruptcy
One major downside of a sole proprietorship is that it is more difficult for a sole proprietor to obtain funding for startup and expansion. Moreover, if funding is obtained through loans, the sole proprietor is exposed to personal liability.
Personal Liability Exposure for an Online Startup
A case in point went before the United States bankruptcy court in Massachusetts in 2015. a Michael Dewhurst, living in Raynham, Massachusetts, sometimes did computer work for Gerald Knappik. Dewhurst decided to start a new business venture-the commercial development of a Facebook poker-playing application. Dewhurst envisioned an application that would enable multiple individuals to play poker together over the Internet through Facebook. Dewhurst informed Knappik of his business plan and predicted that his Facebook poker application "was going to be something very big."
Knappik initially loaned $50,000 to Dewhurst for the project. The loan agreement stated, "The sole purpose of this loan agreement is to provide funds on a personal level for the startup of said business project, in conjunction with borrower's personal funds, not limited to startup costs, operating expenses, advertising costs." That was the first of a series of personal loans that ultimately totaled $220,000.
Dewhurst had repaid only $9,000 on the total outstanding debt when he filed for bankruptcy. Ultimately, the bankruptcy court ascertained that at least $120,000 of the loans that were supposed to be used exclusively for the Facebook poker project had been used for other activities. Furthermore, Dewhurst kept "no contemporaneous records of his disbursements and uses of this cash, no cash journal, ledger, or disbursement slips of any kind."
The Lender Objects to a Bankruptcy Discharge of Monies Owed
During bankruptcy proceedings, Knappik requested that the bankruptcy court deny discharge of Dewhurst's debts to him. Upon review, the court stated that "Dewhurst's failure to keep and preserve adequate records makes it impossible to reconstruct an accurate and complete account of financial affairs and business transactions." The bankruptcy judge ultimately denied discharge of $120,000 of the debt owed to Knappik. Thus, a sole proprietor's failed attempt to create an online poker-playing application led to personal liability even after he had filed for bankruptcy.
Critical Thinking
Sole proprietorships, as well as other businesses, routinely seek funding for online projects. How can the individuals involved avoid personal liability