Small businesses, often sole proprietorships or partnerships, are as vulnerable to bankruptcy if not more so, as large ones. Small businesses may be defined as individual units providing products or services, having a small investment and employing few employees. The number of employees and the amount invested varies from country to country in their definition of a small business. It is an established fact that small businesses face more problems due to their size, and bankruptcy is the inevitable outcome.
Though bankruptcy is the last thing the entrepreneur may want, but sometimes the situation is out of his control, and the business is not able to function the way he had envisioned. Instead of sinking further in debt and losing money each day, it is better for him to agree to seek bankruptcy, and salvage whatever he can. Bankruptcy laws have been formulated to protect the interests of both the debtor and the creditor.
The small business in trouble has to first establish what category it falls into. It could be
- a corporation
- a joint venture
- a partnership
- a sole proprietorship.
According to the U.S. courts regulations, a business owned by an individual in partnership with his spouse, is considered to be a sole proprietorship. This puts various limitation since their debts would be considered personal and they can only file for personal bankruptcy. This can be done under Chapter-7, chapter-11 or chapter-13. All their business debts become personal liabilities.
In the case of a corporation, the business would be a Limited Liability Company or an LLC, and could also be a partnership. They would have the option of filing for bankruptcy under chapter 11 which permits reorganization and the continuation of their routine functions, and thereby remain in business. They would get a chance to reorganize their debts and repay them under a structured Court Approved Repayment Plan. If however, their debts are in excess of $500,000, and the business is in no state to be salvaged, then bankruptcy under chapter 7 would be appropriate. This would mean closure of the business and liquidation of assets to pay off all debts and loans. Under chapter 7 corporations cannot get a discharge of their debts under any circumstances. The assets are liquidated by the trustee appointed by the court who also decides the order in which the payments will be cleared. Simultaneously the creditors of the corporation receive notice about the bankruptcy protection it has applied for. This prevents the filing of multiple lawsuits against the small business.
Corporations filing for chapter 7 bankruptcy cannot include personal liabilities. If there are personal debts that cannot be cleared, the individual would have to file for personal bankruptcy separately. All the partners in a partnership are considered liable for the partnership debts, though they cannot be held personally responsible for any of the debts undertaken for the business.
A Limited Liability Corporation can also file for bankruptcy under chapter 13. However the best course of action is to engage the services of an experienced bankruptcy lawyer, who will be able to give the right advice about which type of bankruptcy the business should file.
Bankruptcy offers protection to the small business and helps to salvage some of the toughest situations of debt.