If you own your business and need to declare bankruptcy, you may be concerned about how it will affect your personal finances. Well, the answer depends on how you initially set up your business and what you would like to do with it going forward.
Assets in a Sole Proprietorship
If you are a sole proprietor for your business, then your business is tied to your personal finances. If you want to close the company altogether, you will need to declare Chapter 7, often called “liquidation.” Both your personal and business debts and finances will be declared bankrupt. All your assets, both business and personal, are sold to repay your liabilities – except the assets protected by law.
If you would like to keep your business going, you can file Chapter 13. You then have monthly payments for your business debts while your business stays open and your personal finances remain untouched for the time being. Essentially, your business continues to run as it was with decreases payments on your debts. Chapter 13 can be helpful if your business is viable, but you have problems paying your current obligations.
Assets in Partnerships or Limited Liability Corporations (LLC)
If you set your business up as a partnership or LLC, then your options are slightly different. Your personal assets are more protected when you set up a company in this manner. Your business assets are at risk if you file for bankruptcy, but your personal assets generally are not. However, personal assets are not protected on the following occasions:
- If a member of a partnership or LLC puts up collateral on a loan, that collateral is forfeit
- If a member of a corporation or LLC guaranteed a loan for the LLC in their name instead of the name of LLC that member has liability for that loan
- If taxes are not paid by a partnership or LLC, a tax lien can be filed against the owners
Regardless of whether you are a sole proprietor, a partnership, or an LLC, all business owners will face a decrease in their business credit score from a bankruptcy. If you are unfamiliar with a business credit score, it is similar to a personal credit score. However, banks use it for working with individuals looking for business loans, lines of credit and more. A bankruptcy will stay on your record for 7-10 years depending on which type of bankruptcy you file. Having bankruptcy on your report does not make it impossible to do business, but it will affect your rating.
If you need information or assistance regarding the different types of bankruptcy and other options available to business owners, contact a Memphis, TN bankruptcy lawyer today. They can help you make the right decisions for you and your business.
Thanks to Darrell Castle & Associates, PLLC for their insight into bankruptcy law and business bankruptcy.