It goes without saying that small business bankruptcies can be extremely complicated. What may seem like a rather simple procedure when business owners get started can end up taking years to resolve under certain circumstances. Along with that, there are many downsides to declaring bankruptcy which every business owner should consider before going this route.
Small business bankruptcy may seem like your only solution, but it may not be. Business owners in serious financial problems should seek out the advice of an attorney and a financial planner before making their decision. That said, if you are considering a small business bankruptcy there are three things you need to know.
Sole Proprietors Cannot File for Their Business Only
When setting up a new business, owners and partners have several different options including:
- a sole proprietorship
- a partnership / limited partnership
- a limited liability corporation
- a standard corporation
Under all these types of organization, except the sole proprietorship, the state recognizes the business as a legal "person" separate from its owners, officers, and partners. Therefore, when one such business files bankruptcy the assets of the company's owners and officers are out of the equation. The small business bankruptcy is declared for the business and the business only, regardless of the financial circumstances of the individuals involved.
With a sole proprietorship no business entity has legally been established. In the eyes of the court the business is simply an extension of the owner, his personal assets included. If a sole proprietor wants to file a small business bankruptcy for his company it is treated as a personal bankruptcy and includes all of his finances and personal property. If you're a sole proprietor, think long and hard before choosing to declare bankruptcy for a failing company.
Liquidation or Reorganization
Corporations, LLC's, and partnerships that are declaring bankruptcy must decide whether they want to liquidate the company and shut it down entirely or simply reorganize. The obvious benefit of reorganizing is the hope that the company will emerge from bankruptcy and return to profitability at some point. This might be an attractive option if owners, officers, or partners have invested large amounts of personal finances into the business. In such a case they might not be willing to give up through simple liquidation.
On the other hand, if the company's liabilities are extremely excessive in relation to assets, reorganization may not be practically possible. In that case liquidation is the simplest and most thorough way to end a small business and its activities. It might be the hardest from the emotional standpoint, but it is certainly the easiest from a legal point of view.
The Length of Process
Business owners and officers who have never been down the bankruptcy road are often surprised to find out how long the process takes. If you have opted for reorganization, most courts will approve a plan that sees re-emergence within 3 to 5 years. During that time the business is free to continue operating on a daily basis, without court interference. Certain major business decisions however, must be approved by the court. If a company is subject to a plan closer to the five-year period, it can seem like forever before you emerge.
When liquidation is chosen, the time the owners and officers will remain involved could be even longer. Sometimes it takes years to entirely sell off assets and satisfy all your creditors. And until that process is completed, the owners and officers of the company still must conduct some semblance of business - at least in terms of keeping the books, filing tax paperwork, and so on. While liquidation can be done within a matter of months, there have been cases where a bankruptcy has been extended for 10 years or more.
It goes without saying that any company whose finances are in serious enough shape as to consider bankruptcy needs the services of a dependable lawyer and financial adviser. Small business bankruptcy is fraught with potential pitfalls if the individuals handling things for you do not know the law. Be sure that whomever you hire has a good amount of experience, a proven track record of success, and a familiarity with bankruptcy court. The better your lawyers and financial advisers, the easier your small business bankruptcy will be in the long run.