Running a small business is complicated and countless factors contribute to whether it is successful or struggling. About 25% of small businesses will fail in their first year... and by year five, about 55% of them on average will have closed up shop for good.

If you are contemplating a business bankruptcy, you will first need to determine what type of bankruptcy you will need to file for. Whether your business is a limited liability company, sole proprietorship, general partnership, or corporation, the business legal structure of your business will determine your liability and what type of bankruptcy you may need to file for.

Types of Business Bankruptcy

Chapter 7 Bankruptcy

You can file a Chapter 7 bankruptcy on behalf of your partnership, corporation, or LLC primarily if your business clearly can’t move forward and you have limited assets to liquidate. In this situation, a bankruptcy trustee sells the company’s assets to pay its creditors. This option is good for small business owners who wish to avoid selling their assets and dealing with creditors.

A sole proprietorship is not a separate legal entity from its owner; therefore, a Chapter 7 bankruptcy cannot be filed solely on behalf of the business since the debts of the business fall on the debts of the owner. The down side is that you must file a personal bankruptcy to get rid of business debts. On the plus side, you can wipe out both personal and business debts and through exemptions, you can protect your business assets as well. You may also be able to run your business even after bankruptcy which is why most owners in a partnership, corporation, or LLC who are liable for the debt of their company file for a Chapter 7 business bankruptcy as well as personally.

Chapter 11 Bankruptcy

Recognized as the business reorganization bankruptcy, Chapter 11 bankruptcy is filed by businesses that wish to continue operating while reorganizing their debts through a repayment plan. While this may seem similar to Chapter 13, additional requirements such as filing ongoing operating reports and the appointment of a creditors’ committee are involved. Furthermore, creditors will be asked to vote on and approve a payment plan before it can be confirmed.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is solely filed for individuals. However, sole proprietors and their business are considered to be the same entity under the law so if you file for a Chapter 13, business debts are included with your personal ones. The benefit to filing for this type of bankruptcy is that you get to keep all of your property while your debts are reorganized through a repayment plan. A Chapter 13 tends to be favored by small business owners with a lot of personal assets or who don’t qualify for a Chapter 7.

Not sure which bankruptcy option is best for you?

Don't worry. A bankruptcy lawyer on UpCounsel can help you answer the tough questions like whether your business should create a new business plan or be liquidated, how best to protect your personal assets, and how to prepare for the future after bankruptcy by re-establishing your credit.

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