Statistically speaking, small businesses are far more likely than large businesses to file for bankruptcy. There are a few reasons for this. The first is the overall failure rate of small businesses. According to the Bureau of Labor Statistics, one in five small businesses fail in the course of their first year, and that number only grows as time goes by, with 30% failing in their second year and nearly half failing after five years in business. But failure is not the only reason for the gap between the percentage of small and large businesses filing for bankruptcy. The other reason for the difference is simple: bankruptcy is just a better answer for small business owners.

Most small businesses do not incorporate, and that means that there is little distinction between the owners’ personal debt and their business debt. Most of the business’ debts are considered personal liability, and that means that when the business files for Chapter 7 bankruptcy, they are able to wipe out both their personal and business debts entirely, with no requirement that those debts be repaid. Business owners are able to move forward with their lives, taking on new jobs or opening new businesses without fear that future earnings will be targeted for debt repayment: they get a true new start. For business owners who reside in high exemption states, this is a particularly compelling incentive to file for bankruptcy, as there is a strong chance that they will be able to retain a good percentage of their assets, including the equity in their home.

By contrast, when a corporation files for bankruptcy under Chapter 7, they face a much more difficult path. Their only option is the complete dissolution of the business entity. All assets are liquidated in order to pay off the company’s debt. In the case of corporations, many opt for reorganization rather than liquidation, choosing to reorganize their debts and pay them off under different terms so that their business can continue operating.

Running a small business is a lifelong dream for many, but when confronted by debt you need to know all the options and choose the one that makes the most sense for you. If you would like to know the legal ramifications of filing for bankruptcy, contact us today to set up a convenient time to discuss your situation.

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