Small Businesses

Filing for bankruptcy as a small business owner can be a difficult process.  In some cases, filing for bankruptcy may jeopardize the future of the business.  However, in some situations, bankruptcy can provide the financial freedom a person is looking for without shutting down their business.

A person may be held personally liable for their business in the following situations:

  • the business is owned solely by the filer;
  • the business is owned in a partnership that includes the filer;
  • contracts for the business are personally signed by the filer;
  • the business owners has disregarded all corporate formalities and otherwise commingled personal and business assets;
  • the filer makes a personal guarantee to financially protect the business.

Depending on the business, a person may be able to file for Chapter 7 or Chapter 13 bankruptcy as a means to protect both himself/herself and his/her business from creditors.  Small business incorporated as corporations, limited liability companies and partnerships are legal entities separate from their shareholders or partners.  This connection can be severed, however, making a small business owner’s business responsibilities different than their personal financial responsibilities.  They can file Chapter 7 or Chapter 11 bankruptcy in their own right.

Proprietorships are just an extension of the owner and as such they cannot file bankruptcy alone.  The proprietor must file bankruptcy for the small business, since the assets and the liabilities of the business are really just one form of assets of the proprietor.  The individual owner may file Chapter 7, Chapter 11 or Chapter 13.

A Chapter 7, whether for the individual or a corporation, may be the best choice when the business has no future, it has no substantial assets or qualities that cannot be reproduced after bankruptcy, or the debts are so overwhelming that restructuring them is not feasible.

Chapter 13 or Chapter 11 bankruptcy provides a breathing space for the small business owners to sell the business as a going concern or its assets in something other than a sudden sale.  Bankruptcy reorganization in Chapter 11 requires considerable time on the part of the owners and managers to comply with the requirements of the bankruptcy system.


Inside Small Businesses