Small Business Solutions
A careful weighing of the positives and negatives of both bankruptcy protection and non-bankruptcy alternatives is required before making any decision. A non-bankruptcy alternative may afford a quicker and cheaper way to legally and successfully reorganize a financially stressed business, as well as offer significantly more control over the business restructuring than a typical Chapter 11 bankruptcy proceeding.
The question many companies ask is, “Should I file for bankruptcy?” But the real question they should be asking themselves is whether a business workout or corporate bankruptcy is the appropriate option for their troubled business. Which alternative would be most helpful to the financial situation of the business?
Bankruptcy Protection as it Affects Different Business Entities
Corporations, LLCs, and partnerships are separate legal entities from their owners, shareholders, and partners. As such, they have the ability to file a Chapter 7 bankruptcy (liquidation of business) or Chapter 11 bankruptcy (reorganization of business) in the name of the entity. Filing a Chapter 7 bankruptcy for a partnership, however, is generally more problematic because it can expose individual partners to possible liability notwithstanding the filing of the bankruptcy.
An individual owner or a sole proprietorship business is really just an extension of the individual owner. Thus, when owned by an individual owner, the “business” cannot file for bankruptcy as a separate entity. The individual business owner (personal proprietor) would be required to file a personal bankruptcy case because the assets and liabilities of the business are just one form of the assets of the individual. Options for an individual filing bankruptcy are Chapter 7, Chapter 11, or Chapter 13 (min-reorganization).
Small Business Bankruptcies
For financially troubled businesses, it’s crucial to determine whether your business should be reorganized or liquidated. It is important to explore and understand the root cause of the problems, the tax consequences of your debt situation, and the ongoing financial problems the business faces. That said, business financial workout and turnaround alternatives to bankruptcy should always be considered first.
Smaller businesses that require little capital and have few assets may not be candidates for bankruptcy protection reorganization. Such medium and small-sized companies are simply a virtual extension of the skills of the principal/owners. In these circumstances, such businesses may be better off in a non-judicial workout (to manage a voluntary liquidation of the business) or in a liquidation bankruptcy.
