Chapter 7 for Different Business Structures

There are different form of business structures with different advantages and disadvantages.  In general, there are four principal business structures namely: Sole Proprietorship, Partnership, Limited Liability Company (LLC) and Corporation.  These business structures can be further classified as incorporated business structures and unincorporated business structures.  Limited Liability Companies and Corporations are created through incorporation and falls under incorporated business structures.  However,   sole proprietorship and partnership firms are not created through incorporation and so are known as unincorporated business structures.

Sole proprietorships, partnerships, limited liability companies (LLC) and corporations are all eligible to apply for Chapter 7 bankruptcy.  Each one of these organizations must have received approved credit counseling within at least 180 day before filing.  Generally most creditors’ claims may be secured or unsecured claims.  A secured claim is really a claim made by a creditor that is secured by a lien on some property or real asset of the business.  However, an unsecured creditor claim is one that is not secured by any lien.

In sole proprietorship, the sole proprietor can wipeout both his/her personal and business debts by filing Chapter 7 bankruptcy.  The sole proprietorship is not a separate legal entity and apart from its owner.  In legal perspective, the sole proprietor and his/her business has the same legal entity.  In sole proprietorship, the business debts are considered as the personal obligations of the sole proprietor.  If the sole proprietor fails to repay the business debts, the creditors can claim and recover all debts from the assets of the business and sole proprietor.

A partnership is created by two or more individuals agree to jointly own and carry on a business.  Chapter 7 liquidation process is an orderly way to shutdown and liquidates the partnership business.  The partnership can be general partnership, limited partnership, and limited liability partnership.  In general partnership, all partners are treated as general partners and all are personally liable for any business debts.  In limited partnership, it necessitates one general partner with multiple limited partners.  The general partner is personally liable for business debts.  However, the limited partners are excluded from such personal liability.  The personal liability of limited liability partnerships are match with limited partnership.  In partnership business structure, generally, the personal liability extends to all general partners’ personal assets.  It is mandatory that all limited partnerships and limited liability partnerships are registered with the secretary of state.

LLCs and corporations have separate legal entity and these business structures are liable for their own business debts.  The owners of LLCs and corporations are usually not personally liable to any business debts.  Chapter 7 bankruptcy offers to liquidate the assets of the corporation or LLC and settle its business debts.

The nature of business structure is very important if the business faces a possible bankruptcy.  When a business fails in its payments to the creditors, that situation leads to accretion of business debts and finally to a bankruptcy claim.


Inside Chapter 7 for Different Business Structures