If you are reading this, you most likely own a business. Owning a business can be very tough. Trust us, we know.
One of the things that almost all businesses have to deal with at one point or another is debt. Sometimes the debt can become overwhelming to the point that payments are being missed, lawsuits are being filed, taxes are becoming delinquent, and various other unpleasant realities are taking place. At that point, a business or business owner may want to consider filing some type of bankruptcy to shut the business down or to continue to operate, relieve the pressure, and reorganize.
Business bankruptcy cases can be very complex. It is imperative to have experienced legal counsel that specializes in business bankruptcy. This is not something that should be attempted without an attorney or even by an attorney that does not specialize in this area of the law. If you own a business and want to explore bankruptcy as a possible solution to business debt, as always, feel free to contact our office and an experienced bankruptcy attorney will be there to guide you. The business bankruptcy section of the Steidl & Steinberg website outlines the different types of business bankruptcies and how they generally work. This will at least get you on the path to considering your alternatives and bankruptcy is the right step for your business.
Personal Bankruptcy vs. Business Bankruptcy
Before discussing the different types of bankruptcy that a business can file, it is extremely important to discuss the difference between a personal bankruptcy and a business bankruptcy. In order to do so, it is equally as important to understand the difference between a business that is a separate legal entity and a sole proprietorship.
A business that is operated as a sole proprietorship is a business that has one owner and is not a separate legal entity. In other words, the business is not a corporation, or an LLC, or an LP or any other type of business entity. The reason this is so important is that a business that is a sole proprietorship cannot file a bankruptcy. In this instance, the individual owner has to file a bankruptcy.
For example, John Smith is a plumber. He is the sole owner and operator of a business called “Smith’s Plumbing”. The business is not incorporated and is not a separate legal entity. The only thing John has done is register the name with the state of Pennsylvania and it has its own EIN number. Under these facts, Smith’s Plumbing cannot file a bankruptcy case. John Smith himself must file a bankruptcy case and the debts and assets of Smith’s Plumbing will be included in that case.
On the other hand, let’s change some facts in this example. John Smith is a plumber. He is the sole owner and operator of a business called “Smith’s Plumbing”. However, in this example Smith’s Plumbing is an LLC and its actual legal name is “Smith’s Plumbing, LLC”. “Smith’s Plumbing, LLC” is its own separate legal entity. It is now an LLC and not a sole proprietorship. Smith’s Plumbing, LLC is now eligible to file its own bankruptcy case separate and apart from the owner, John Smith.
This distinction is extremely important in determining the type of bankruptcy proceeding to file and what the effect will be on the owner of the business. With that in mind, here are the different Chapters and how they relate to businesses and individuals that own businesses.