STOP! Before you even consider filing for bankruptcy as a small business owner, it’s important to understand how your business is structured, and whether you made any personal guarantees on any of the debts. The U.S. Small Business Administration (“SBA”) wrote this great article on bankruptcy and the small business, which provides more detail on the subject. Today, I will focus on the Sole Proprietor, which tends to cause many financial woes to the small business owner and their family.
A Sole Proprietor is a form of small business that is owned by one person and there is no legal distinction between the owner and their business. The owner is personally liable for the debts of the small business and usually the debts are taken in the owner’s name. In the event that the owner of this structure of business cannot pay his debts, he would file a personal bankruptcy case under either Chapter 7, 11 or 13 depending upon the amount and nature of his debts.
It’s important to be prepared to meet with your bankruptcy lawyer by first meeting with your accountant and tax adviser. Your accountant can prepare your income and expenses from the operation of your business, so that you can properly determine your net income and any income taxes that will flow from the operation of your business. Once you have these important numbers, then you can prepare your personal household income and expenses and present that information to your bankruptcy attorney to analyze whether filing bankruptcy is right for you. If you need to file for bankruptcy, your attorney will advise you which chapter of bankruptcy is right for you.
A Fresh Start may be just what your business and family needs to get you back on track toward your financial goals. Every situation is unique and requires a personal approach. The decision to file bankruptcy requires a great deal of thought and planning. Your planning should include short range and long range goals. It’s also extremely important to begin planning and consulting with your accountant and bankruptcy lawyer as soon as you become aware of financial difficulties with your business. Waiting until the very last minute to make important financial decisions is never a good idea because you deprive yourself of effective decision making and the real benefits that bankruptcy has to offer.
Photo Credit: Paul Keleher