Personal Liability in Business Chapter 7
If your small business is struggling, and you have considered filing business Chapter 7 bankruptcy in order to get out from under your debt burden, you have probably wrestled with the question of how much liability you will personally have in regards to the debt repayment. This can be a very tricky issue as it relates to business structure, and a bankruptcy lawyer would certainly be the best resource to turn to if you are unsure how to proceed. With that in mind, here are some of the basics about personal liability in a business Chapter 7 filing.
What Type of Business?
The level of personal liability involved in a small business Chapter 7 depends largely on the type of business organization. Sole proprietorships and partnerships, generally speaking, have a much higher level of personal liability for the owners than corporations. In a sole proprietorship, the business is seen as an extension of your personal worth, and in nearly every case you are 100% liable for the business's debts. Under sole proprietorship law, you and your business are legally the same entity, so your business's debts are your debts, and if the business does not have assets to cover its debts, creditors can come after your personal assets, as well.
In partnerships this is generally true, with the notable difference that each partner is fully responsible for the entirety of the business's debts. This is significant in that if your partnership files for business Chapter 7 bankruptcy and your partner is unable to pay any part of the debts, creditors have the legal right to take your property to cover 100% of the debts, not just what you might consider your share.
Liability For Corporations
Small business owners whose companies are organized as corporations or LLCs have more flexibility in terms of liability, as the corporation is viewed as a separate entity for tax and liability purposes. However, a high number of small business owners are still personally responsible for at least a portion of the business's debts. The main ways an owner becomes personally liable for corporate debt are through personal loan guarantees, collateral, and personal contracts. Personal loan guarantees are often the only way for a small corporation or LLC to get the funding it needs to get off the ground; investors will often balk at investing in a company that has no assets, and will require a personal guarantee from the owner, or some of the owner's property to be used as collateral against the loan.
What Type of Business?
The level of personal liability involved in a small business Chapter 7 depends largely on the type of business organization. Sole proprietorships and partnerships, generally speaking, have a much higher level of personal liability for the owners than corporations. In a sole proprietorship, the business is seen as an extension of your personal worth, and in nearly every case you are 100% liable for the business's debts. Under sole proprietorship law, you and your business are legally the same entity, so your business's debts are your debts, and if the business does not have assets to cover its debts, creditors can come after your personal assets, as well.
In partnerships this is generally true, with the notable difference that each partner is fully responsible for the entirety of the business's debts. This is significant in that if your partnership files for business Chapter 7 bankruptcy and your partner is unable to pay any part of the debts, creditors have the legal right to take your property to cover 100% of the debts, not just what you might consider your share.
Liability For Corporations
Small business owners whose companies are organized as corporations or LLCs have more flexibility in terms of liability, as the corporation is viewed as a separate entity for tax and liability purposes. However, a high number of small business owners are still personally responsible for at least a portion of the business's debts. The main ways an owner becomes personally liable for corporate debt are through personal loan guarantees, collateral, and personal contracts. Personal loan guarantees are often the only way for a small corporation or LLC to get the funding it needs to get off the ground; investors will often balk at investing in a company that has no assets, and will require a personal guarantee from the owner, or some of the owner's property to be used as collateral against the loan.