One of the biggest complications of filing bankruptcies arises when a small business is concerned. If you own a small business, then business expenses and your market might affect personal finances, and your own personal financial situation could also affect your small business’s outlook.
Filing for bankruptcy as a business is very different from filing for bankruptcy as an individual. However, to a small business owner with a lot of personal investment in a business, it might feel like one and the same thing. And depending on the situation, they might actually be the same thing. If you’re considering filing for bankruptcy, and you’re a small business owner, here are some things you might need to know:
Your Debt Liability Will Be Determined By Organization Type
The biggest condition determining what kind of bankruptcy to file (i.e. filing as a business, or as an individual, and which chapter of bankruptcy you should file, or can file) will be what type of business it is. A sole proprietorship is a business owned by just one person, and there is no distinction between the individual’s debts and legal obligations, and those of the business. In this case, bankruptcy for the individual will be the same as bankruptcy for the business.
Now on the other hand, an LLC (Limited Liability Corporation), most kinds of partnerships, and a corporation are all considered separate entities from the business owners, and so those businesses are responsible for their own debts most of the time, and personal finances won’t be drawn into a bankruptcy application. However, most individuals who own small corporations are required to sign personally on loans for the corporation by the lender. In these situations the corporation does not protect the individual from the debt.
Chapter 7, 11, and 13 Are All Options in Business Bankruptcy
Only Chapter 7 and 13 bankruptcy can be filed by individuals. Chapter 11 is the most common kind of bankruptcy used by corporations because it allows a lot more flexibility that might allow the business to continue despite bankruptcy, but it’s used most often by larger businesses.
Chapter 7 bankruptcy is an option for both businesses (like corporations and LLCs) and individuals, as well as sole proprietorships wherein the business and individual are the same entity. In Chapter 7 Bankruptcy, all business assets are liquidated and sold to pay off creditors. This process is controlled by a trustee appointed by the bankruptcy court. This can be especially useful to the person filing for bankruptcy if they don’t want to be involved as much in the process, and free up their time to do other things. This type of bankruptcy is most often used for businesses when the business is definitely over, and there will be no reorganization in order to keep it going. Corporations do not receive a discharge in bankruptcy.
Chapter 13 Bankruptcy is only an option for individuals, but it’s handy for sole proprietorships in order to resolve personal and business debts together. Some choose this option because there are things that you’re able to do with a Chapter 13 Bankruptcy filing that you can’t with Chapter 7, like prioritizing creditors and consolidating loans in order to minimize debt.
If you’re looking into your options for bankruptcy, but you also have business ownership obligations, it’s important to define the lines between personal liability and business obligations, and to understand all of your options. Consult with a specialist in bankruptcy law in order to determine what the best option will be for you.