Most people understand the different kinds of personal bankruptcy but what about small business bankruptcy? If your business is in trouble should you file for bankruptcy? A small business can certainly be dissolved without opting for bankruptcy, so what’s the best option?
Your small business bankruptcy options depend on the kind of business you have. Is your business a corporation, a partnership, or a proprietorship? Why should this matter? Corporations, limited liability companies and partnerships are legal entities that are separate from their shareholders or partners. This means that they can file Chapter 7 or Chapter 11 bankruptcy in their own right.
A proprietorship is really just an extension of the business owner. This means that the proprietor must file bankruptcy i.e. personal bankruptcy (Chapter 7 or Chapter 13). This is because the assets and the liabilities of the business are assets of the proprietor. In this case small business bankruptcy and personal bankruptcy are one and the same. So which is the better option - Chapter 7 or Chapter 13?
In short a Chapter 13 bankruptcy means your debts will be reorganized while a Chapter 7 bankruptcy means the assets will be liquidated. To know which option to take you need to know a bit about what has caused the financial problems in the first place. Filing for Chapter 13 won’t create markets, increase revenue, or make up for poor business management. So your Chapter 13 small business bankruptcy may not have the effect you desire.
A Chapter 13 bankruptcy can make some cash available from servicing the old debt to make sure that your business can keep running. It can also help pay for leases or contracts that are not helping the business. Chapter 13 can stop the loss of critical assets or money due for creditors. In short it can help to provide breathing space and in so doing help sell your business. So Chapter 13 small business bankruptcy does have its advantages.
The money you make from the sale could be used to pay taxes and salaries, and keep your staff employed. After this you could opt to change to a Chapter 7 small business bankruptcy or have the filing dismissed.
Chapter 7 bankruptcy should be filed when it is clear that the business has no future. It is also the solution if the business has no assets or the debts owed by the business are extreme. In this case some debts can be discharged and the business can be restarted at a later stage. This is suitable for a small business bankruptcy but corporations are not allowed discharges.
However a Chapter 7 small business bankruptcy can help to liquidate assets with the help of a trustee without costing shareholders a cent. Your creditors will be paid based on the money generated and where they fall in the queue. Any taxes that are liable will be paid once expenses have been deducted.
If you own a small business and are not sure which option would suit you best talk to your attorney. Make sure he explains the pros and cons to you in terms of the unique nature of your business. Not all the small business bankruptcy information listed above may be relevant in your specific circumstances.
