Bankruptcies are complicated no matter what. This is even more true, however, if you own a small business. Although in theory your business is a separate entity than yourself, this is not always legally true, and there will be some crossover.
A Sole Proprietorship
If you operate your business as a sole proprietorship, you and your business are essentially one legal entity. Therefore, the debts of your business are personal, and vice versa. That means that if you have a sole proprietorship, you must include both your personal and business debts in your bankruptcy filing, as well as the assets of both.
The good news is that your business still exists after you file for either Chapter 7 or Chapter 13 bankruptcy. You may lose some assets, depending on the business, but in most cases, there is little value in selling off your business to pay off your creditors (after all, if you are an accountant working alone, the courts can’t exactly value and liquidate you). You may even be able to claim an exemption for “tools of the trade,” which should protect a limited number of assets necessary for doing your job.
A Corporation or LLC
If you own a corporation or an LLC, your business usually has a legal existence independent of you as the owner. Just like you are not personally liable for the business’s obligations, your business is not liable for your personal obligations. This usually means that you (and any partners) can carry on with business as usual.
Nonetheless, your shares of the company are considered personal assets in your bankruptcy. That means that your portion of the corporation may be liquidated to pay off your creditors in certain cases. This decision will depend on:
- The type of personal bankruptcy you choose to file,
- The marketability of your shares,
- The percentage of ownership you have in the corporation, and
- The net value of the corporation’s assets.
If you own most of a corporation and have a number of interested buyers or high value assets, your portion of these theoretically could be liquidated during the bankruptcy process. Because every small business is highly unique, it would be impossible to predict a general outcome for each corporation if you file for personal bankruptcy. An experienced bankruptcy lawyer will be able to better look over the contracts and legal obligations involved in your specific case in order to better predict an outcome.
Before filing for personal bankruptcy, all small business owners must consider the consequences for their businesses. Knowing how to proceed with a personal bankruptcy while protecting your business requires a detailed analysis of each person’s particular factual circumstances. If you are a small business owner who is in over your head with personal debt, a bankruptcy may be the solution you are looking for, but it is important to get professional help in protecting your business in the process. At Luftman, Heck & Associates, we have years of experience helping small business owners in financial distress negotiate a positive outcome for a complex Cleveland bankruptcy. Call us at (216) 586-6600 today to set up a free consultation and find out how we may be able to help in your specific situation.