If you own a small business and you’re thinking about filing for personal bankruptcy, you have a lot of questions. How does it work? How much time will it take? And the last question you’d want to ask, but the question we’re here to answer today: what happens to my business when I file? At Delancey Street, it’s a question we hear from owners who are already behind on a merchant cash advance or a loan. The answer to this question depends on how your business is structured. Is it a sole proprietorship, a corporation or LLC, or a partnership? Here are seven things that can happen, depending on that answer.
For a Sole Proprietor
First, if you’re a sole proprietor, the business goes into the bankruptcy with you. In this arrangement, you are the business and the business is you. There is no legal distinction between you and your business. As the owner you receive all the profit, but are responsible for all the debt, losses, liabilities.
Second, a Chapter 7 filing can reach your equipment. Chapter 7 is liquidation. The bankruptcy trustee sells nonexempt assets to pay debts. For a sole proprietor, this can include assets used in the business. These could include equipment or materials you use to create and market your products or services. But your business assets are also subject to additional exemptions.
Third, Chapter 13 may let you keep what you have. In Chapter 13, instead of losing equipment and materials you use for your business, you set up a plan to repay creditors. So which is better for a sole proprietor? Chapter 7 is one of the faster forms of bankruptcy because repayment comes from nonexempt assets. If you own a business that you cannot afford to have liquidated, then consider filing Chapter 13 instead. Chapter 13 will provide for a payment plan and leave the assets intact.
Corporation or LLC
Fourth, if you have an LLC or corporation, the business is usually less exposed. When a business is set up as a corporation or LLC, the two are separate legal entities. The assets of the business do not usually go towards paying the personal debts of the owner.
Fifth, that protection gets thinner when you own most or all of the company. However, if the business owner is the sole or majority shareholder, the bankruptcy trustee might decide to sell off the shares they own in the company. If these shares represent a large portion of the business’ finances, it may not be able to recover. Personal service businesses generally have limited assets, because the business is a mere conduit.
Sixth, if you share ownership equally with others, the trustee’s vote usually changes little. The trustee can vote your shares, but in practice rarely will impact the financial circumstances of the business. Where all of the shareholders, or partners, have an equal share in the business, it is unlikely that the trustee’s voting of shares on your behalf will affect the business.
Seventh, if you’re in a partnership, the business is more likely to be pulled in. As with a sole proprietorship, each partner shares personal liability for the debts of the business. When one partner files for personal bankruptcy, the partnership’s assets may need to be sold to pay off creditors. For example, if the partnership has a $400,000 loan, each partner is on the hook for the full amount, not 50%. Partnerships will usually end as a result of this situation to avoid financial instability.
If you have mixed your personal and business funds, you’ve put everything on one credit card, or you can’t afford your payments, see an attorney before you start filing bankruptcy papers. Your structure decides how much of the above applies to you. The earlier you know that, the better.
Delancey Street is a business debt settlement company, not a law firm. We negotiate directly with merchant cash advance funders, lenders, and business creditors for amounts less than what is owed. We don’t sell another loan. For some owners, bankruptcy is a better option. In those cases, we refer them to a vetted independent bankruptcy attorney. Our first consultation is always free and confidential. If we see a better solution or if bankruptcy is the appropriate path, we tell you that on the first call.
