Bankruptcy and Proprietorship

Written by jessica Alba

If you are having financial trouble with your business and you are considering all of your options, bankruptcy and proprietorship should be contemplated simultaneously. Filing for bankruptcy as a lone business owner is much different than claiming bankruptcy as a partner or a large corporation. The laws are designed to take ownership into account. In fact, a bankruptcy lawyer will have advice for your personal circumstances. Bankruptcy is not a one-size-fits-all proposition. Each case has unique challenges.

On your Own

If you are the sole proprietor of your enterprise, in the eyes of the law, you are your business. In other words, you can actually lose it all, unless you seek the professional help of a bankruptcy lawyer. For example, not many years ago, a middle aged man had a thriving business. In fact, he had multiple sources of income. He was always trying to think of some way to improve the profitability of his many ventures.Unfortunately, he basically counted his chickens, before they even hatched. In other words, he spent beyond his means on the belief that he would soon see greater profits. But, whether it is a reflection of the economic times, or his simply miscalculated the expected return on investment, he eventually lost it all.

In fact, as a result of his business financial troubles and the emotional toll, he also lost his house and family in the process. While it may sound a little over the top, it is actually quite a natural result, if you declare bankruptcy as a sole proprietor. More often than not, a budding entrepreneur will use all of his/her assets to get the business going. So, it is all susceptible to the bankruptcy proceedings. Therefore, if it is all tied together, it will be subject to the law.

For example, if you transfer assets in your name to a friend or family member within 12 months prior to filing for bankruptcy, it will be suspect. You can pretty much count on the asset to be claimed during the bankruptcy. So, whoever now has the money or property will have to give it back. In fact, if the court determines that you intentionally tried to swap property to keep it later, you will be in lots of trouble. In fact, you could become a resident of the state penal system.

So, be sure to listen to your bankruptcy lawyer, even if he/she is trying to save your business. Ignoring his/her advice can land you in jail. You will also still be responsible for alimony, child support, student loans, back taxes, etc. As sole proprietor, your business and personal finances are subject to the letter of bankruptcy law.

Together, not Forever

If you are considering small business bankruptcy and you have a partner, it will be a bit more difficult. Often, if you are struggling financially, so is your partner. Thus, you both will have to file bankruptcy. However, if you are the only one to file, you will want to consider dissolving the partnership. If you are both in agreement, it makes it much simpler; maybe your partner will want to buy out your portion of the business and relieve your debt issues. But, if your partner wants to keep the business and you want to get out and/or file bankruptcy, it can get very complicated.

You and your bankruptcy lawyer will have to determine what assets and liabilities are your responsibility, and what belongs to your partner. For example, did you and your partner put in startup finances 50/50? What about the debt? Are you the frugal one that always kept debt within the limits? Did your partner take the business credit card, used for business expenses, and get the business in trouble by charging too much?

When you go to bankruptcy court, all of these issues and more will have to be ironed out, for the judge to determine what debt belongs to you and should be included into the bankruptcy. It will also help your lawyer to know how to advise you, regarding the type of bankruptcy that would be the better choice for your financial future.

The Best Advice

Whether you have sole proprietorship or you have one or more partners, do not wait until you are set to file bankruptcy before contacting a bankruptcy lawyer. He/ she may have some options worth considering before taking that last final leap. Also, you will have plenty to think about and prepare for, just in case.

If you are not the sole proprietor, maybe your partner will want to buy you out. Maybe when you file for bankruptcy, it will also force your partner into the same boat. If you own your own business outright, how will bankruptcy affect all of your assets, both personal and professional? Essentially, do your homework and make sure you are not jumping from the frying pan into the fire. Leave room for a brighter financial future.