Filing for bankruptcy is often a scary process for any type of person, especially for business owners that are filing a business bankruptcy. Many business owners wonder how filing a business bankruptcy will affect their personal credit history, and while there is no exact answer to this wondering thought there are a few principles that apply to different business situations.
The affect a business bankruptcy plays on a business owner is generally determined on how the business was originally structured. When a business is formed there are several different categories it can fall into, including a sole proprietorship, corporation, or a limited liability company. Based on what type of structure a business falls into is what determines how a business bankruptcy will affect the business owner.
Bankruptcy on a Sole Proprietorship
When a business owner starts their own business under a sole proprietorship structure then the owner is personally liable for all business debts that are incurred. Business owners that own this type of company do endure damage to their credit report if they file for bankruptcy. To put it simple, in the eyes of the court the business owner and their personal debt and business debt are one in the same. The best type of bankruptcy to file when an owner files for one on a sole proprietorship company is a Chapter 13; this type allows the business owner to reorganize their business and pay off debts over a certain period of years. If they file a Chapter 7 bankruptcy then their home, automobile and other personal assets can be sold to pay for business debts incurred.
Bankruptcy on a Corporation or Limited Liability Company
When a business owner opens a business under a corporation structure or a limited liability company structure then their personal assets cannot be affected during a business bankruptcy. In the eyes of the court the business owner and their business are not considered one entity. Due to the fact that business owners cannot be held personally liable during a business bankruptcy they often open a business under a limited liability company structure.
Employee Wages During a Bankruptcy
Anytime a business owner files a business bankruptcy they must pay any wages that are owed to business employees; this applies to any type of business structure. If the business owner fails to pay employees their earned wages then the business owner can be held personally liable.
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