Is Bankruptcy the Right Option For My Business?

18 Jul Is Bankruptcy the Right Option For My Business?

Filing bankruptcy for your business can end the frustration and stress of trying to keep the “doors open” on a failing endeavor. But is it necessary?

If you have a sole proprietorship, you can’t file bankruptcy just for the business without including all of your personal assets and debts. That may be a good thing, and will give you a “fresh start” so you can get on with your life. After the bankruptcy, all of your debts; both personal and business; that can be discharged will be gone.

On the other hand, a Corporation or a Limited Liability Company (LLC) are separate entities and filing bankruptcy for that kind of business won’t involve your personal assets or debts.

So, should you file bankruptcy?

First of all, you probably wouldn’t be thinking about this if your business was doing well. The economy has taken its toll on everything from personal debt to what were once thriving small businesses. When your Corporation or LLC fails there are several things you can do:

1. You can simply close the doors and walk away. The state will consider the business “inactive” and eventually you will have abandoned the name and entity.

2. You can properly dissolve the entity by notifying the state, selling any assets and using the money to pay creditors a pro-rata share.

3. You can file bankruptcy. The court will appoint a trustee who will take charge of gathering the business assets, selling them and distributing the proceeds appropriately.

Which is best? It really depends on the type of creditors you have and what you intend to do in the future.

If you want to continue to work in the same industry as the business, either by yourself or as an employee, than I don’t recommend the first option. It will leave your customers and creditors with a bad taste in their mouth. And they will probably find you to demand some answers

Thus, the choice often comes down to the 2nd and 3rd options: dissolution or bankruptcy. Dissolution means you and your employees do the work. You are responsible to gather receivables, sell assets, and distribute the funds. In a bankruptcy, the trustee will do all of that, albeit she will need a lot of information and a little help from you.

Dissolution is generally less expensive than bankruptcy. If you do the paperwork yourself for filing with the state the costs are nominal. Even hiring an attorney to dissolve the Corporation or LLC is much less expensive than a small business bankruptcy.

But, sometimes it’s worth the cost to just turn the whole business over to the trustee in bankruptcy and let your attorney and her work it out. And you can get on with your life. And, I have found that often creditors are quicker to give up trying to collect a debt when there was a bankruptcy. Without it, some creditors just won’t understand that a dissolved entity means they can’t come after the owner.

These are tough decisions. A lot depends on individual circumstances. Whatever you decide to do, you need a good attorney to guide you through the process.

Photo credit: Steve and Sara (via Flickr).

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

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