Personal and business matters are intertwined for most small business owners, I find. The owners, and in many cases their family members along with them, live and breathe the business. As a bankruptcy lawyer in Indianapolis and ithree other Indiana cities, I learn over and over how difficult it is for the owners of small businesses to perceive where business stops and personal life begins. And, as I in turn reveal to them, if the business is a sole proprietorship, their perception is legal reality – their business is just an extension of them! If the business is in trouble and needs to be liquidated, it’s the owner who files bankruptcy, because the assets and liabilities are those of the owner.
But if the business is held in the form of a corporation, a partnership, or a limited liability company (LLC), that business is a separate legal entity and can file Chapter 7 or Chapter 11 bankruptcy in its own right, without the owner himself or herself filing.
Understand, though, a Chapter 7 business bankruptcy is different from a Chapter 7 bankruptcy filed by an individual. The bankruptcy court can discharge debts of an individual and give that individual a fresh start. Businesses don’t get their debts discharged. What the Chapter 7 bankruptcy can provide is an orderly liquidation under the direction of a bankruptcy trustee, at no cost to shareholders. Creditors are paid to the extent assets are available. If there are any assets available after that, the money can help pay any individual taxes for which the owners may be personally liable.
A Chapter 13 small business bankruptcy is also different from an individual Chapter 13 bankruptcy. The purpose here would be to buy time for the owners to sell the business as a going concern, or at least sell the assets without going down to fire sale price levels. The proceeds could be used to pay salaries or taxes after the creditors are paid. If the business has substantial assets, a Chapter 13 bankruptcy could be a viable choice.
No matter the legal form of the business, bankruptcy is a very bitter pill for many small business owners, whose pride is so vested in the success of their “baby”, to swallow. But bankruptcy is one area in which it may prove a blessing to have the business act as a legal entity separate from its owners.