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Personal or Business Bankruptcy? | Tacoma Bankruptcy Attorneys

December 7th, 2016 Bankruptcy Law

Owning and operating a small business can be an enormous undertaking, especially if you have racked up debt. If you’re a struggling small business owner in Tacoma, Olympia, Seattle or the surrounding Puget Sound, it’s important to understand the different options you have when faced with financial difficulties. At Law Offices of David Smith, we are often asked about the difference between personal or business bankruptcy.

The first question you must ask yourself if you’re considering filing for personal or business bankruptcy on your small business is, “should my business be liquidated or reorganized?” Take time to consider this question carefully – your bankruptcy options depend on this answer.

Calculator and coins on a table

The difference between personal and business bankruptcy depends on the structure of your small business. If you are a sole proprietor, there is no legal separate entity from the business and its owner. This means you are personally responsible for its assets and liabilities and as a result, you will file for personal bankruptcy. Sole proprietors may file for Chapter 7, Chapter 13, or Chapter 11 bankruptcy depending on which applies for your unique financial situation.

If your small business was formed as a corporation, partnership or limited liability company (LLC), you will file a business bankruptcy under Chapter 7 or Chapter 11. Corporations and LLCs are separate legal entities, meaning it is liable for its own debts. The owners of the company are not typically responsible for the obligations of the business. As a result, forming a corporation or an LLC is an effective way to protect and separate your personal assets from business debts.

Both sole proprietors and separate entities can file under Chapter 7 bankruptcy. Chapter 7 allows you to wipe out both personal and business debts by filing a single, personal bankruptcy. However, filing under Chapter 7 will results in the end of your small business. This is a great option for small business owners who see no viable future in their business, or who face immense debt that they wouldn’t be able to reorganize. In order to file for Chapter 7 bankruptcy, the debtor will need to pass the “means test” to determine if your income is low enough to qualify.

Separate entities do not receive a discharge by filing under Chapter 7. Filling a business bankruptcy under Chapter 7 for corporations and LLCs are designed to liquidate the company’s assets to pay its debts. The proceeds are then distributed among shareholders.

Only individuals are allowed to file for Chapter 13 bankruptcy, while corporations or LLCs cannot. If you are a sole proprietor, you can file a personal Chapter 13 to clear personal and business debts. Under a Chapter 13, you get to maintain your assets and pay back debts through a repayment plan. As a small business owner, you get the opportunity to keep operating your business with hopes of success for the future. There are various requirements in order to be eligible for Chapter 13, including having a sufficient income and secured debt under $1,184,200.

Chapter 11 bankruptcy is typically intended for large-scale corporations, as oppose to small businesses. Chapter 11 is generally considered to be a more complex and time-consuming process compared to Chapter 13. However, anyone is eligible to apply and there’s no limit regarding the amount of money owned by the debtor. Chapter 11 and Chapter 13 are similar in that it allows debtors to continue operating their business and propose plans to pay back debt.

Small businesses play an incredibly important role in our local economy. David Smith and his legal team are here to support fellow small business owners to help them thrive and get back on their feet. If you’re a struggling small business owner, schedule a complimentary consultation with us to better understand your best course of action for the future.