If you are a small business owner facing a mountain of personal debt, you are likely concerned about how filing for bankruptcy would affect your business. The answer is not straightforward, as much depends upon the way that your business is organized and what type of business you are operating. In some cases, you may be required to close the business operations entirely. To get an idea of how a personal bankruptcy might affect your small business, we have assembled a quick reference guide.

  • Sole proprietor – If your business operates as a sole proprietorship, there’s a good chance that filing for bankruptcy will lead to your bankruptcy trustee asking you to close it temporarily. The goal of closure is to provide time for the business’ assets to be assessed for possible sale of assets. Closure will also prevent the business from incurring any more debts and protect against further liabilities for personal injuries and the like. If you operate as a freelancer or another type of business that does not have assets, you may be able to continue operating. Keep in mind that your accounts receivables will become part of the bankruptcy estate and may be used to pay your creditors.
  • Partnerships and LLCs with Multiple Members – If you own a share in a business, then your share will become part of your bankruptcy estate. This does not give the trustee the right to take any of the partnership or LLC’s assets, though they can issue a “charging order” against your business interest so that if you would be owed a distribution of profits or income, the trustee would be able to receive it for distribution to creditors. Some partnership agreements require that you end ownership interest before filing for bankruptcy in order to avoid any complication involving ownership interest, so it is a good idea to check the terms of your agreement before taking any action.
  • Corporations and Single-Member LLCs – If you own corporate shares or are the sole or majority owner of a corporation or LLC, your shares or membership interest can be taken by your bankruptcy trustee and sold or liquidated to generate assets for the satisfaction of creditors. Whether this is done will depend upon a cost/benefit evaluation of whether assets are exempt and how much they can be sold for.

As you can see, there is no simple answer to how a bankruptcy filing impacts a person who is the owner or who has ownership shares in a small business. For guidance in your specific situation, contact us today to set up a time to discuss your situation.

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