Does A Business Bankruptcy Impact The Business Owner Individually?
Business owners who are considering the possibility of a business bankruptcy want to know if they will be affected individually by the business bankruptcy. The answer to that question depends upon the business structure, as well as whether the business owner is personally liable for any business debts. In other words, there are some situations in which a business bankruptcy will not affect a business owner’s personal finances or credit, and there are other situations in which a business bankruptcy can have a significant impact on an individual business owner’s personal financial and credit. Consider some of the following information from our West Palm Beach bankruptcy lawyers.
What is the Structure of the Business Entity?
The structure of the business entity can be critical for determining whether an individual business owner can be personally liable for business debts and therefore impacted by a business bankruptcy filing. When a business is structured as a sole proprietorship, the law does not recognize a distinction between the individual and the business for purposes of taxation, bankruptcy, and other financial matters. To be clear, the sole proprietorship and the individual business owner are, for all intents and purposes, one and the same. As such, when a business owner with a sole proprietorship files for business bankruptcy, that business owner will, in effect, also be filing for personal bankruptcy.
This interrelation of the business owner and the business entity can be helpful if the owner of the sole proprietorship wants to file for a reorganization bankruptcy because that business owner can file for Chapter 13 instead of Chapter 11, saving costs and complications in the bankruptcy process.
Other business structures are their own entities, including partnerships, limited liability companies (LLCs), and corporations. Accordingly, the business owner(s) will only be impacted personally by the bankruptcy filing if they are personally liable for business debts.
Personal Liability for Business Debts
When are business owners of partnerships, LLCs, and corporations personally impacted by a business bankruptcy? Generally speaking, individual business owners can be personally liable for business debts when they have signed personal guarantees for business loans or any debts associated with the business. In a reorganization bankruptcy, personal guarantees may not be as problematic for the business owners since the business will aim to remain open and pay its debts through a repayment plan.
However, when a partnership, LLC, or corporation files for liquidation bankruptcy under Chapter 7, a personal guarantee can result in significant personal liability for a business owner.
Can a Business Owner’s Personal Bankruptcy Affect the Business?
Similar to circumstances in which a business files for bankruptcy, an individual business owner’s decision to file for personal bankruptcy will only affect the business if the business is a sole proprietorship. If the business owner is an owner of a partnership, LLC, or corporation, the business owner can usually file for consumer bankruptcy without the consumer bankruptcy filing affecting the business’s financial circumstances.
Seek Advice from a Bankruptcy Lawyer in West Palm Beach
When you have questions about the links between personal finances and business bankruptcy, you should seek advice from a West Palm Beach bankruptcy attorney at Kelley Kaplan & Eller.
Sources:
law.cornell.edu/uscode/text/11
sba.gov/business-guide/launch-your-business/choose-business-structure
