Bankruptcy Offers Help for Small Business Owners

The first years of a new business can be difficult. Businesses typically open as small enterprises hoping to grow larger. The challenge for many is managing the costs of operating a business as it develops. Small businesses often face greater challenges than large businesses because they lack the financial cushion to weather fluctuations in the market and economy. Unfortunately, this is the reason many small businesses fail.

To get credit for a business venture, business owners frequently have to sign a personal guarantee for the funds they borrow. This means that even if a small business is set up as a corporation or an LLC, a business owner's personal assets may still be on the line. To protect their assets and their families, many business owners find relief in troubled financial times by filing Chapter 7 small business bankruptcies.

Advantages of Small Business Bankruptcy

Small business bankruptcies have several features that make them attractive to people whose business loans are backed by personal guarantees. The chief advantage is cost. Unlike Chapter 11 bankruptcies, which can be expensive and requires extensive oversight, a small business Chapter 7 bankruptcy helps by allowing the small business owner to file bankruptcy personally and list personally guaranteed debts of the business at the same time. This could mean the end of the business if the LLC or corporation has significant debt, or vendors and suppliers vital to the business are listed.

The personal bankruptcy filing helps the small business owner by protecting personal assets such as a home and car by using bankruptcy exemptions. What happens to business assets will largely depend on how the business is structured.

Business Structure Matters

A small business is typically set up as a sole proprietorship, an LLC or a small corporation. The main difference between the sole proprietorship and an LLC or a small corporation is that of identity. A small business set up as a sole proprietorship is essentially treated as an extension of the owner; there is no distinction between the owner and business itself. Because there is no barrier protecting the business owner, a creditor may go after all of the owner's personal possessions to satisfy a debt that is owed.

A small business corporation and an LLC are separate legal entities from the owner.
Assets of the business are separate from those of the individual. Taxes may be paid separately as well. A simple valuation of the business subtracts the value of its assets from its liabilities. That value may be able to be protected in the individual's bankruptcy. With a small business, the owner's personal assets are generally shielded from creditors unless he or she has personally guaranteed the debt that is owed. Now, it is increasingly common for banks to require a personal guarantee before they will authorize a business loan to a small business corporation or an LLC.

Bankruptcy Can Accommodate Different Goals and Needs

Business owners may have different goals and needs when they approach bankruptcy. While some may want to close the doors and fold up shop, others may be looking for a way to clean house and keep the enterprise going. With the proper guidance and planning, bankruptcy can be used to accomplish these different needs.