Business bankruptcy can be a little more tricky than a personal bankruptcy due to the difference in the types of businesses. Corporations, partnerships and sole proprietorships all vary quite a bit in terms of how the business is structured and operates. These differences also influence how the bankruptcy case may play out.
A sole proprietorship is a business that is owned and operated by a single individual. Filing for bankruptcy as a sole proprietorship may allow for the majority of debts to be discharged under a Chapter 7 case, but not without its costs. The most notable difference for sole proprietorships is that it must filed as personal bankruptcy because there is no legal separation between yourself and your business, unless the sole proprietorship is operating as a single member Limited Liability Company (LLC). If the business is operating as a LLC, a business bankruptcy may be filed. However, if any of the debts accumulated in the business operations have ties to your personal finances or credit accounts the debts may not be easily discharged.
Partnerships and Corporations
Partnerships, multi-member LLCs and corporations can be complicated in bankruptcy. If any of these business types file for business Chapter 7, the debt liabilities, asset division and ownership shares come into play. If one of the business owners or shareholders does not agree with the bankruptcy filing, their stake in the company could be jeopardized by the liquidation of assets and debt elimination. If operations cease and the business rights are terminated, the non-filing member has few options or courses of action.
Filing for bankruptcy in a partnership, multi-member LLC or corporation can be better managed in a Chapter 11 bankruptcy. Since business operations are generally spared in a Chapter 11 bankruptcy, governing members are not at risk of having their stake taken or liquidated by creditor. However, there are cases in which the business owners agree to give up their stake to a third party as part of the debt restructuring process, but this requires the approval of all governing members.