Deciding to file for bankruptcy is a big step, especially if you own and operate a business. You need to get out from under your debts, some which were directly related to your business, while other debts were strictly personal. Business owners worry about how the bankruptcy will affect their business, with good reason - the idea of closing down your business and the loss of income can be quite worrisome. The good news is that the point of bankruptcy is to help you make a fresh start, not make your life more difficult.
Bankruptcy for business owners requires knowledge of both state and federal law. For this reason, we strongly recommend that you talk to a Minnesota bankruptcy lawyer before filing your bankruptcy to make sure you understand all of the options.
What Kind of Business Do You Own?
If you own a small business and are considering bankruptcy, the first question your Minnesota bankruptcy attorney will ask you is if it is incorporated or if you operate it as a sole proprietorship. The answer to this question, together with your plans for the business, will probably shape what kind of bankruptcy you should file and what will happen to your business. Because the distinction is so important it may be helpful to review the differences between the most common types of business entities.
Sole proprietorship: the business is not a legally distinct entity, even if you operate the business under a different name. As a result, any assets or income related to the business is considered part of your individual assets and income.
LLC or Limited Liability Company: This is a business entity formed by one or more people, referred to as the “members.” The LLC is owned by the members but is recognize
Corporations: Corporations are legally separate entities that are owned by their shareholders.
The principal benefit of forming an LLC or a corporation is to separate yourself from your business. That said, your ownership interest in the company may be considered a personal asset in your bankruptcy case.
What Are Your Plans for the Business?
You also need to think carefully about what you plan to do with your business. If your business is failing and is the reason why you are considering filing for bankruptcy, the best option may be to use the bankruptcy process to wind it down.
On the other hand, people are sometimes forced into bankruptcy due to unexpected personal expenses (such as medical bills) or other major life changes even though their business is doing well. If you are in this situation, a Minnesota bankruptcy attorney can help you map out a strategy to minimize the impact on your business while helping you get out from underneath debts that are impossible for you to pay. An experienced Minnesota bankruptcy lawyer can help clarify your business objectives and develop a plan that meets your needs.
Personal Bankruptcy and Sole Proprietorships
As mentioned above, there is no legal distinction between a sole proprietor and the business entity. As a result, the assets and debts of the business are the assets and debts of the owner and will be considered part of the owner’s personal bankruptcy.
Because the business and the owner are one and the same, the bankruptcy trustee in a Chapter 7 case may therefore force the business to close in order to liquidate the assets and pay the creditors. In making this determination, the trustee will look at the value of the business assets as well as the likelihood that you will take on additional debt. If you operate a service-based business with no significant assets and a low likelihood of taking on additional business debts, the trustee may allow you to continue to operate the business.
In a Chapter 13 case, the trustee may allow the business to continue operating. However, you should be aware that your business debts, assets, and income will be considered a part of the bankruptcy estate. As a result, business debts will likely have to be repaid as part of the Chapter 13 plan. In addition, certain business decisions may require approval by the bankruptcy court, such as taking on additional debt.
LLCs and Corporations
Because LLCs and corporations are legally separate entities, the assets and debts of the business won’t be involved in your personal bankruptcy case. However, your ownership interest and income from the business will be considered part of the bankruptcy estate. The bankruptcy court can therefore require that any income from the business be paid into the court and distributed to your creditors. If you decided to sell your ownership interest, the bankruptcy court would attach any proceeds from the sale.
The good news is that your business would likely be able to continue operating. That said, if you are the majority owner of the business or you are the only member of a single member LLC or corporation, the court may force you to close and liquidate the business.
It’s important to note that your business’s governing documents may require that you take certain steps in the event of bankruptcy in order to protect the business. These may require you to sell your ownership interest or give up control.
Consult with a Minnesota Bankruptcy Attorney
Filing for bankruptcy can be pretty complicated for people who own and operate a business. In the above, we’ve just touched on a handful of the issues you need to consider. An experienced Minnesota bankruptcy attorney can help you navigate the process in order to meet both your business and personal objectives. The attorneys at Kain & Scott have decades of experience in representing small business owners in bankruptcy court. If you’re considering bankruptcy, let us help you make the right decisions - call us at 800-551-3292 or contact us online in order to schedule a free consultation.
