Even the most diligent owner cannot guarantee success for every business. For small businesses, especially those owned by sole proprietors, Chapter 7 bankruptcy may be the best option. When your company is a partnership, LLC, or corporation, Chapter 7 Business Bankruptcy is more complicated. It is rarely beneficial to these entities.
Bankruptcies do not erase the debt and may expose businesses to other liabilities, like lawsuits to lift the corporation’s veil. Partnerships and companies that have given personal guarantees are more likely to file Chapter 7 bankruptcy. If you’re contemplating bankruptcy, you can get help choosing the right one.
Is It Your Responsibility To Pay Business Debts?
A personal guarantee and a strong company structure can make you personally liable. When a company can’t pay, a personal guarantee ensures payment. Whatever structure you choose, you’re responsible. Or you may be liable depending on your business.
Sole Proprietor
You and your business are considered one when you own and operate a business. Chapter 7 bankruptcy allows you to discharge both your personal and business debts. If your business debt exceeds your debt, you will not be subject to the means test in Chapter 7. Exemptions can be applied to both business assets and personal assets.
Therefore, filing for Chapter 7 can enable you to wipe out your debts and continue to operate your business. Businesses can usually keep some amount of property, making them ideal for service-oriented businesses like accountants and personal trainers. Businesses like restaurants and clothing stores require expensive equipment, goods, and supplies, making Chapter 7 filing difficult.
Your business often cannot continue if Chapter 7 trustees sell non-exempt assets. The trustee may even sell your business if that’s possible.
Partnership
A partnership can file Chapter 7 bankruptcy, and it is a separate legal entity. Partnerships that declare bankruptcy will not be discharged of their business debts. Moreover, partners are not allowed to claim exemptions. Trustees close and liquidate businesses by selling their assets and paying off their creditors.
When a general partnership goes bankrupt, the partners are individually liable for the company’s debts. If business assets cannot satisfy all creditors, the trustee (or creditors) may set aside partners’ assets to satisfy the debt.
After a business closes, the owners usually file chapter 7 bankruptcy and discharge personal and business debts. A clause in the partnership agreement enables the business to dissolve if one of the partners files for bankruptcy.
Corporation
Corporations may also file Chapter 7 bankruptcy. However, they will not be discharged as partnerships would. With Chapter 7 bankruptcy, your business can be liquidated effectively and efficiently since the trustee handles the sales and payments.
At times, the benefits of this type of bankruptcy outweigh the risks. A shareholder can guarantee or cosign a corporate debt (until they go bankrupt) but is still liable. It is possible to negotiate for a lower corporate debt due to a higher property sale price. Thus, corporate creditors will experience a reduction in their financial burden.
By declaring bankruptcy, creditors can challenge officers’ compliance with corporate formalities. This is known as “piercing the corporate veil.”. If shareholders are successful in such lawsuits, they are liable for the company’s debts.
Limited Liability Company (LLC)
The bankruptcy and debt liability of an LLC are nearly identical to those of a corporation. Businesses can file for bankruptcy to liquidate, but individuals must file for bankruptcy to remove personal liability. These risks are also present.
Final Words
Every case is unique and cannot be generalized. If you consider personal bankruptcy or business bankruptcy, you need to decide which type of bankruptcy is right for you. A bankruptcy attorney can guide you through the process of reviewing your case facts and explaining the ramifications and options available to you.
