Chapter 7 bankruptcy proceedings help the small business owner to save it or to liquidate it. The liquidation or survival of a business in mainly depends on its business structure. The business structure of a business depends on its incorporation. In other words, there are incorporated and unincorporated business structures. Incorporated business structures have separate legal entity, whereas unincorporated business structures lack separate legal entity.
A sole proprietorship is an unincorporated business structure where it lacks separate legal entity. Therefore, the sole proprietor is personally liable for all business debts of his/her business. In Chapter 7, the sole proprietor actually files a personal bankruptcy to dispose his personal and business debts. However, a partnership, corporation, or limited liability company (LLC) have separate legal entity and these forms of business are incorporated or registered with the secretary to the state. The personal liability of these business structures’ business debts are depends on many factors. In the case of a partnership firm, the general partner is personally liable for all business debts. However, limited partners in a limited partnership or limited liability partnership will not be personally liable over the business debts of the firm. In the case of a corporation or limited liability company (LLC), the stockholders or owners of it will not be personally liable over the business debts if they cosigned or personally guaranteed any debts.
When a Chapter 7 bankruptcy is registered, an automated stay goes into effect and prevents most of the recovery actions from the creditors. A bankruptcy trustee is appointed by the court and assigned with selling off the debtor’s nonexempt real property to pay off its creditors according to their priority. In Chapter 7 personal bankruptcy, all unsecured debts of a debtor are wiped out or discharged. However, in a business bankruptcy, there is no discharge or no exemptions and the bankruptcy trustee liquidates all business assets to disburse the proceeds among the creditors.
Chapter 7 bankruptcy affects each type of business structures and its owners in different ways. 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.
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.