Personal Bankruptcy and Your Small Business

Many individuals facing potential Bankruptcy are small business owners.  They may be the only or one of a few shareholders of an S-Corporation or only member of a Limited Liability Company.   This complicates the nature of the Bankruptcy estate and limits what can be accomplished in the discharge.
Generally speaking, a small business that is incorporated under state law is its own legal entity, separate from the actual people that own it.  However, in a Bankruptcy, the Trustee takes control of the Debtor’s assets and property as if they were the true owner.  They can do with those assets anything that a typical owner of property can do.  The debtor’s ownership of an LLC or small corporation is an asset of which the Trustee may take possession.  If the business has significant assets, inventory or accounts receivable, the Trustee may find a way to assert control of these, and in some cases, dissolve the business.

If the company is mostly a service company with little inventory and few assets other than the labor of the owner, there is little chance the business will be affected by the personal Bankruptcy of the owner.  Furthermore, if the owner signed any personal guarantees on the business debts, those guarantees will be discharged by the Bankruptcy.  This means that the owner will no longer be personally liable for the business debts.  This protects the owner by reestablishing the limited liability of the corporate form, but it does not repair the health of the business itself.   The debts of the business will not be discharged by a personal Bankruptcy.
Ultimately, many small business owners who go through a personal Bankruptcy must dissolve their business and start a new one.  While the exact same name of the business cannot be used, a similar one can be used.  Alternatively, many small business owners go to work for someone else as an employee while they rebuild their credit.
A business owner should consult with a Bankruptcy Attorney or a Small Business Attorney to determine all available options based on the unique circumstances of the business and the business owner.