CAN I BANKRUPT MY BUSINESS WITHOUT BANKRUPTING ME?
Many clients have come to me and said, “I don’t want to file bankruptcy personally. I just want to bankrupt my business.
This is easier said than done.
The first question that has to be asked is what type of entity are you operating your business as? Are you operating as a Corporation, a Limited Liability Company or as a sole proprietor?
If you have not filed papers with the Secretary of State to establish a Corporation or Limited Liability company, then you are probably operating your business as a sole proprietor. What this means from a legal standpoint is that you and your business are one and the same. All of the assets that your business owns are also your personal assets and vice versa. More importantly, all of the debts that the business has incurred are your personal debts as well. If this is the case, then it is impossible to “bankrupt” your business without bankrupting yourself because there simply is no difference between you personally and your business.
Now if you have taken the extra step of incorporating your business or establishing a Limited Liability Company by filing the appropriate papers with the Secretary of State, then you have created, from a legal standpoint, a separate legal entity. That separate legal entity can own property in its own name and incur debts in its own name. Furthermore, you are not legally responsible for the debt that it incurs in its own name. Thus, in theory, that separate legal entity could file bankruptcy without you personally having to file.
However, most creditors, when loaning money to a Corporation or Limited Liability Company, require what is called a personal guaranty from the individual owners of the company. This is a legal document signed by you an an individual promising that should your company fail to pay the debt to the creditor that you agree to be personally responsible for that debt. If you have signed such a document, then filing bankruptcy on behalf of the company will do you no good, since the creditor will be able to take legal action against you to collect the debt.
So if you are contemplating “bankrupting” your business, you need to find out which of your debts you have personally guaranteed, because those debts will not be eliminated by your company filing bankruptcy. If you are not sure, request from your creditors a copy of everything that you have signed and have your attorney review it.