Business bankruptcy, generally filed as Chapter 11, encompasses many circumstances that will determine the vulnerability of your personal assets in a business bankruptcy case. Rely on a full service business counsel to determine which assets are at risk, and why.
Depending upon the structure of your business, the risks to your personal assets can vary greatly. If you are a sole proprietor or a partnership, there will be a greater chance of creditors coming after your personal assets than if you are an LLC or corporation. It is far from being that simple, however. An LLC, although offering greater protection than a sole proprietorship, does not protect all personal assets as well as a corporation. In addition, a small business owner, regardless of the business structure, is often required to sign a personal guarantee:
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• To the banks for a credit line
• To the landlord for rent of the business property
• To vendors for materials
These personal guarantees make all personal assets regarded like collateral and subject to liens and liquidation.
There are other areas which a business owner may be personally responsible for, such as payroll and certain taxes, and a business bankruptcy will have no effect on this responsibility. The importance of consulting with a qualified bankruptcy attorney, and a business accountant, prior to filing can accurately determine what options for personal asset protection might be available to both the small business owner and the larger corporation. You may be personally impacted by the filing but the degree of adversity can be greatly affected by the presence of these professionals as advisors.
The way a bankruptcy affects one's personal assets is, to a high degree, established during the formation of the business and how the personal liability is predetermined. Whether the business is treated as a single entity or a separate entity during its formation decides much of the personal risk factor. Unfortunately many persons start a business without considering the risks that may go with a potential bankruptcy. No one plans to go bankrupt, but more than half of small businesses fail their first year.
It is not necessarily fact that an even an LLC or corporation will be exempt from personal suits being filed. Automatic stay provisions of the Federal Bankruptcy Law may extend to foreclosures and personal legal proceedings if reorganization under Chapter 11 is not possible.
If you, as an individual, borrowed cash and infused it into a business at the inception and converted the business to a LLC or corporation later on, that money is still guaranteed as a personal liability. It is a common misconception that once a sole proprietor incorporates that all personal obligations are buried in the corporate organization. In fact this could not be further from the truth.
Full service business counsel should be consulted prior to starting any business because every business has risks. Experienced professionals can help to reduce those risks at the onset and help to shelter one's personal liabilities in the future.
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