How your business is affected by your bankruptcy filing depends on the legal form of your business and your choice of chapter.
When your business is incorporated, you no longer technically own it. What you own is the stock in the corporation that owns the business.
(For our purposes here, corporations and limited liability companies are interchangeable.)
The corporation is a legal “person”, separate from the persons who own the stock in the corporation. When the shareholder files bankruptcy, the stock he owns is just one of the assets of the bankruptcy estate. The corporation is free to continue to operate.
During the administration of the case, the issue will be what, if any, value the stock in that corporate entity has.
The situation is different if the business is not incorporated. There is no legal distinction between a proprietorship operation and the person who owns it. The business is not a separate legal “person”.
For bankruptcy purposes, that means that the debts of the enterprise are the debts of the owner. A sole proprietor can’t file bankruptcy just on the debts of the enterprise.
Instead, the owner’s bankruptcy filing brings the business assets and value into the bankruptcy case.
Choice of chapter
For the owner of an unincorporated entity, the choice of chapter is critical. In Chapter 7, the trustee most often wants to shut down any commercial activity just as soon as they learn of it.
Trustees are concerned about the business incurring additional liabilities post filing; they are also worried about assets walking out the door if the owner is permitted to continue operations.
Not so in Chapter 13, where the debtor is explicitly authorized to continue commercial activity. The proprietorship in Chapter 13 can roll right along, if that’s what the debtor wants.
You’ve got choices
The choice I present to sole proprietors who want to continue in business despite a personal bankruptcy is: incorporate or file Chapter 13.
Learn about Chapter 13.
More about the role of bankruptcy trustees.
When your business is in trouble
Image courtesy of bfick.