Published by Mark

Small Business Bankruptcy And The Corporate Veil

December 4, 2008 at 1:01 pm

Before I can get down to the business of filling out paperwork and making important decisions with new Indiana bankruptcy clients, the first thing I usually need to take care of is debunking all the myths they’ve heard about bankruptcy. With small business owner clients, I find, one of the biggest myths they’ve been clinging to is the idea of the “Impenetrable Corporate Veil”. That’s because, when that business owner decided to incorporate in the first place, their main motivator was being protected from losing personal assets if the company were to be sued.

Now, what is true about the law is that if a business is held in the form of a corporation, a partnership, or a limited liability company (LLC), that business is a separate legal entity from its owner. That, in turn, means that a business can file Chapter 7 , Chapter 11, or Chapter 13 bankruptcy in its own right, without the owner him/herself filing (see Yes, Your Business Can File Bankruptcy Without You!).

The problem with the “Corporate Veil” idea is that most small business owners never really kept that veil intact. Personal and business matters were always intertwined. The owners, and in many cases their family members along with them, not only lived and breathed the business, their business and personal finances were intertwined from the get-go! The first “holes” were pierced in the “Corporate Veil” when, in order to borrow money top establish the business in the first place, the owner was required to use personal assets, in many cases home equity, as guarantees for the loan. Now, the client is coming to me to file a business bankruptcy, feeling sure that she/he is fully protected, and, too often, that simply isn’t the case.

Some other things about keeping the business and the personal separated that I often find hasn’t been done by business owners is that they didn’t maintain separate accounts, one for personal, one for business, at their bank, weren’t rigorous about paying business and personal bills from those separate accounts, and weren’t careful about signing contracts and agreements only in the name of the business. Needless to say, by the time business owners have arrived at one of my bankruptcy law offices to talk about it, it’s too late to fix those things, and the result is, bankruptcy will need to be filed individually as well as in the name of the business.

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