Bankruptcy Options for the Sole Proprietor

When a person decides to start a business, the potential owner has to make a lot of decisions such as where to locate the business, how to market, and deciding on a business strategy.  The legal aspects of starting a business, especially if it is the owner’s first time out, can seem less important than making money and managing the company. 

The first legal principle to recognize with sole proprietorships is that the business is not separate from its owner.  If you are in such a situation, you are probably all too aware of this fact.  This means that the business owner is individually and personally liable for any debts the business incurs.

This personal liability of a sole proprietorship has serious implications should the company enter bankruptcy protection.  First, a business established as a sole proprietorship cannot file for bankruptcy without the business owner (one good reason to set up a business as LLC or corporation).  Second, the individual owner’s assets may become available to both the company’s and the individual’s creditors.

The question that many people have with their own personal business is whether the bankruptcy trustee or court will close the business completely.  The answer to this question will depend on a number of factors.  However, the main factor is which Chapter of bankruptcy the business owner chooses to file under in the bankruptcy court.

Chapter 7 is also known as liquidation.  The Chapter 7 trustee will sell all “non-exempt” assets to pay off creditors.  A business that is not able to exempt much of its assets will be required to close based on the inability to function as required as compared to its business needs.  There is also a growing trend with sole proprietorships of trustees simply closing the business to prevent the business from incurring further liabilities. 

If the owner of the company has significant assets and wants to continue operating the business, Chapter 13 may be the better alternative.  In Chapter 13 the owner’s debts are reorganized and a payment plan is created to pay part or all of the debts over a three or five year period.   The owner can keep all of the business property through this repayment process. 

Ultimately, if you are considering bankruptcy for sole practitioner debts, consider all of your alternatives, including setting up a separate business identity.  If bankruptcy is needed, contact the Henshaw Law Office today at (408) 599-1305.