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Filing a Chapter 7 Bankruptcy Petition as a Small Business

On Behalf of | May 20, 2014 | Bankruptcy

For struggling small business owners, the distinction between personal bankruptcy and business bankruptcy can be of tremendous importance. Depending on the organizational structure of your business, that distinction may be difficult to make. While bankruptcy can be a powerful tool for giving hardworking but struggling business owners a second chance, it is crucial to understand what impact business bankruptcy may have on your personal finances, and vice versa, before embarking on the process.

The Chapter 7 bankruptcy process requires petitioners to relinquish property, subject to certain exemptions, in exchange for a general discharge of most unsecured debt. For the small business owner who files for personal bankruptcy, this often means selling your business interests and using the proceeds to pay your creditors. Debtors filing personal bankruptcies are allowed to keep assets that are subject to exemptions. For those filing Chapter 7 on behalf of a business, however, the impact on your personal finances depends on the type of business in question:

  • If you operate your business as a sole proprietorship, there is no legal distinction between you and your business. This means that you are personally liable for your business debts and there is no distinction between your personal and business assets. Some of your business assets may qualify as exempt personal property, allowing you to save them from liquidation.
  • If your business is organized as a partnership, you may file for business bankruptcy without involving your personal assets. However, because general partners are personally liable for the debts of a partnership, creditors can still pursue them directly even after the partnership has been liquidated and dissolved.
  • If your business is organized as a corporation or LLC, you have the highest degree of protection. Stakeholders in these types of businesses are usually not personally liable for business debt unless they co-signed or guaranteed the business loans. If you are the owner of a corporation or LLC, you can most likely file a Chapter 7 petition without jeopardizing your personal assets.
  • Businesses organized as a partnership, corporation or LLC must be completely liquidated and closed if the business files a Chapter 7 bankruptcy because exemptions do not apply to businesses.

A knowledgeable Elk River Chapter 7 bankruptcy attorney can examine your financial situation and corporate structure to help you determine which course of action best serves your small business.