Depending on your business structure, filing for personal bankruptcy could affect your business assets.
Being a small business owner has its perks, but unfortunately there are a lot of risks as well. Small business owners simply do not have the same job security as employees of government agencies or large corporations. Sometimes, they end up sacrificing their personal finances to the needs of the business, funneling more and more of their savings into the business or else drawing such a small salary that they have to go into debt to cover their daily needs.
Sound familiar?
If you are deeply in debt and it becomes necessary for you to declare personal bankruptcy, you might be concerned about how this will affect the business you’ve worked so hard to build. Well, the impact of your bankruptcy will depend on two things: the type of business you have incorporated as and the type of bankruptcy you choose to file.
Sole Proprietorship
If your business is a sole proprietorship, your personal assets and your business assets are actually considered part of one entity in the eyes of the law. This means that your personal bankruptcy will create a de facto small business bankruptcy as well.
If you file Chapter 7 bankruptcy, it is likely that your business assets will be liquidated as part of the bankruptcy. However, it may be possible to use some exemptions to allow you to keep tools of the trade or other assets. Often, you end up having to stop operating your business during Chapter 7 bankruptcy because the bankruptcy trustee will not allow you to take on any new debts during the bankruptcy proceeding.
If you want to keep your business open, consider filing Chapter 13 bankruptcy. This type of personal bankruptcy offers more flexibility as to business and personal assets you get to keep, but it will not wipe out all your unsecured debts like Chapter 7 would.
General Partnership
Jointly owning a business with one or more co-owners in a general partnership puts you in a similar situation as having a sole proprietorship—you are personally liable for business debts and therefore your business debts will be included in your personal bankruptcy. However, there will not be any exemptions available for business property held in a general partnership if you file Chapter 7. Unless your partner can purchase your share of the business, it will most likely have to close. Filing Chapter 13 may allow the business to remain open.
Corporation
If you have incorporated your business as a limited liability partnership or as a corporation, the business is considered a separate entity and should not be affected by your personal bankruptcy. The only exception would be personal loans that you took out in your own name but put towards the business. These loans are your responsibility and will be included in your bankruptcy.
Learn More At California Bankruptcy Relief
If you would like to learn more about bankruptcy options for small business owners, please contact California Bankruptcy Relief today.
