How Will My Small Business Be Affected By My Personal Bankruptcy? (Part One)

by Adrian Lapas, Esq.

September 10, 2009

This is a tough question and a lot it depends on how you operate your business.  Before the question is addressed, it may be useful to go back over the various forms of businesses typical of a small business owner.

Sole Proprietorship:  This is where you operate the business by yourself–you have not incorporated and you are not partners with anyone.  You are the sole “owner” of the business.  You can have additional employees and you may have completely separate business checking accounts but, from a legal standpoing, there is no difference between the business and you.  You own all the equipment and you are resonsible for all of the liabilities.

Corporation (C Corp. or S Corp.):  This is a completely separate legal entity.  You had to file papers with the Secretary of State to create this legal entity and you have shareholders (you may be the only one) and corporate officers (again, you may be the only one).  The corporation can own property in its own name and functions for most purposes as a completely independent person.  You would not be the “owner” but merely a shareholder and you do not have any interest in any property that the corporation owns (except on liquidation as a shareholder).  Corporations can only act through people, that is, its agents.  An agent must act on behalf of the corporation to get the corporation to do something.

Partnership:  if you are in business with someone else and you have not formed a corporation or other legal entity, then you will be a partnership.  A partnership likewise can be considered a separate entity and it can hold property in its name as well.  But, all the partners are generally liable for the partnership debts.

There are other business entities such as limited liability companies, limited liability partnerships, but these are very similar to the above entities.

So, how will a bankruptcy affect your small business?  As stated above, it depends significantly on the type of business you operate.

If you operate as a sole proprietorship, your business debts are your debts.  There is no distinction.  So, if you are beset by either too much business debt or too much personal debt (for a sole proprietorship, there really is little legal distinction but for ease of description, business debt is that incurred for the operation of the business while personal debt is household or family debt), you must list all of your debts.  You must also disclose all of your assets–business and personal.

If you file bankruptcy, understandably, your trade creditors that are critical to your continuing to operate your business will, most likely, be very relunctant to continue to extend credit to you.  Similarly, items that you use in your business will be considered an asset of your bankruptcy estate and could be sold by the trustee to pay your creditors.

These types of bankruptcy cases are often the toughest particularly where the debtor wishes to continue to operate the business because future credit may not be available once you file bankruptcy.  Most times, if a sole proprietor files bankruptcy, the business is closing down, particularly if a chapter 7 is filed.  While it is certainly possible to continue business operations, with limited access to future credit to fund day to day operations (if necessary–many small businesses operate very well with very little credit), a bankruptcy filing for a small business generally signals the end of business operations.

If you are beset with too much debt and are operating your own small business, discuss your issues with an experienced bankruptcy attorney such as my colleagues on this network.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.

Last modified: September 10, 2009