If your business has failed or is about to, it does NOT likely need a bankruptcy. But YOU personally might.
Most small businesses do not have any reason to file bankruptcy after they fail. Instead it’s the individual owner or owners of the business who may well have to think about bankruptcy.
The business usually doesn’t need a bankruptcy because it doesn’t have enough assets to justify going through a formal bankruptcy distribution procedure. Instead, the business dies and its debts fall on the owner, who then needs to protect his or her assets and future income.
When a small business owner sets up his or her business as a corporation, one reason for this is because in theory only the corporation is liable for its own debts, the debts of the business. The investor-owners of the business are not liable for those business debts. That is at the heart of what a corporation is—a legal structure of limited liability.
But in practice it doesn’t work that way, not with small businesses. Why? Because:
As a result, when the business cannot pay its debts, the individual shareholder(s) are either directly liable or through personal guarantees become personally liable on all or most of the debts of the business. The business corporation’s limited liability is trumped by the shareholders’ contractual obligations on the debts.
By the time most small businesses close their doors, they have run themselves into the ground and do not have much remaining assets. And often, what little is left is mortgaged, with the assets tied up as collateral, leaving nothing for the corporation’s general creditors. This applies not just to purchases and leases of assets, but also to bank loans which require a blanket lien on all business assets, and commercial premises leases with broad landlord liens.
Without any assets with which to operate, the business dies. Without any assets for creditors to pursue in the business, the debts die with the business, except to the extent the shareholders are personally liable.
But sometimes the business does still have substantial assets when it closes its doors. Assuming the business is in the form of a corporation or partnership and so is eligible to file its own Chapter 7 bankruptcy, doing so may be worthwhile for three reasons:
Regardless whether your business can or can’t file bankruptcy, and whether or not it ends up doing so, you will likely have to bear the financial fallout personally. By their very nature bankruptcies arising out of closed businesses tend to be more complex than straight consumer bankruptcies. So be sure to find an attorney who is experienced in these kinds of cases.