Filing bankruptcy is a very scary process with a lot of unknowns. Throw in owning a small business, and it can be extremely overwhelming. The three most common types of small businesses are sole proprietorships, corporations and limited liability companies. The main characteristic of a sole proprietorship is that there is not a legal distinction between the owner and the business. What this means when filing a personal bankruptcy is that if the sole proprietorship has any assets, those assets will be considered the owner’s when filing bankruptcy.
If your small business is a corporation or a limited liability company, then the business is a completely different entity that is separate and apart from the owner(s). Outside of bankruptcy, this means that the debts of the owner are not the debts of the business, and the debts of the business are not the debts of the owner. This also means that any assets the business has only belongs to the business and not to the owner(s).
However, inside of bankruptcy things are little different. When you file a personal bankruptcy and are the owner of a corporation or limited liability company, the debts of the business are still not the debts of the owner and vice versa. What is different is that the assets of the business will be considered the assets of the owner for bankruptcy purposes. Whether the business assets are safe will depend on whether you file a Chapter 7 or a Chapter 13 Bankruptcy and whether the business has any assets. If the business does not have any assets, then the business should not be affected by the owner filing a personal bankruptcy, regardless of which bankruptcy chapter is being filed. Things can get a lot more difficult if your business has assets. Continue reading →