The economy has been hard on all of us; small and large businesses alike have felt the effects. Most often, the news focuses on corporate bankruptcies and large company debts, when small businesses are struggling as well. So what happens to a small business when the owner is facing personal bankruptcy? Do they have to close down or liquidate their company? Or can it be saved?
The answer is simple. You will most likely have a few options, based on the kind of entity you own.
Small businesses are usually either a sole proprietorship or an incorporated business or LLC. When you own a sole proprietorship, there is no legal distinction between you, as the owner, and the company itself. This generally means that the owner’s bankruptcy is also the business’s bankruptcy. Since there is no separation of identities, business debt is considered the same as your consumer debt and has to be listed in your personal bankruptcy. This also applies to assets; all proprietorship assets will need to be listed as personal assets. This would apply in the reverse situation as well, if the business needed to file for bankruptcy, then the owner’s debts and assets would be factored in.
Luckily for LLC or corporation owners, the business and your personal finances are considered two separate entities. This means that the owner is not personally liable for the business’s debts and the business can’t be held liable for any of the owner’s personal debts. There are, however, a few cases of closely-held corporations that do not receive this protection, so consulting an experienced Brownsville bankruptcy attorney before choosing an entity designation is always important. Generally, most LLCs and corporations will be completely separate from personal finances and your personal bankruptcy will only affect your personal interest in the company. If the owner of an LLC or corporation declares personal bankruptcy, the business can run as usual, but their interest in the company will need to be listed as a personal asset.
These business owners have two bankruptcy options; they can file a Chapter 7 or Chapter 13 Bankruptcy. A Chapter 7 will discharge unsecured debts, whereas a Chapter 13 is an adjustment or reorganization of debts. While your best option can only be decided by you and your attorney, a Chapter 7 Bankruptcy is typically recommended if your business income and assets fall below a certain amount set by the IRS. Chapter 7 allows a clean start for your personal finances and will hopefully have the least impact on your business ownership.
About the Author: Jeff Davis is the Owner of the Davis law firm and a highly experienced Brownsville bankruptcy attorney. To find out more information about a Rio Grande Valley bankruptcy lawyer, please visit www.jeffdavislawfirm.com.