I am frequently asked, “Can I file bankruptcy for my business?” which is a simple question. The answer, however, is more complicated than the question.
The first issue to look at is the form of the business. The most common business forms are corporations, limited liability companies (“LLCs”), and sole proprietorships. A corporation or LLC is a separate legal entity distinct from the owner or owners. A corporation or LLC is required to pay annual fees to the state, maintain records, and in most cases file tax returns. As a separate legal entity, a corporation or LLC is entitled to file bankruptcy. A sole proprietorship, on the other hand, is one and the same with the personal affairs of the owner or owners which means it has no ability to file bankruptcy separate from the owners.
A bankruptcy for a corporation or LLC offers the opportunity for the business to reorganize or liquidate. A bankruptcy by a corporation or LLC will only resolve debts as to the business and will not be viewed as a bankruptcy by the owner, which means the owner’s credit report does not reflect a bankruptcy. A bankruptcy for a sole proprietorship is a personal bankruptcy by the owner and will reflect on the owner’s credit reports.
All this makes a corporation or LLC seem like the best option for any business but, alas, that is not necessarily the case. A personal guarantee is a contract where the individual promises to pay one or more debts if the corporation or LLC fails to pay. Many lenders, suppliers and others will insist that the owner of a small corporation or LLC sign a personal guarantee as a condition to doing business with the corporation or LLC. Additionally, many tax debts will be imposed on the owner of the corporation or LLC if the business fails to pay.
A common sense goal in forming a corporation or LLC is to ensure that if things go awry financially, the individual is able close the business without damaging his or her credit. However, personal guarantees will undermine that goal. Needless to say, understanding which debts are personally guaranteed is critical. As important as it is, this is not easy to determine. Reviewing the underlying contracts is the best way to determine whether or not a personal guarantee was signed in favor of a specific creditor, but in many cases the contracts involved are not readily available. People often show me invoices or monthly statements assuming the name on the document accurately reflects who is liable for the debt. Unfortunately, the name shown on an invoice or billing statement is, at most, an indication of who is likely responsible for the debt. Credit reports are another indicator but are not a reliable way to know whether a personal guarantee was signed. Simply asking the creditor if the debt is personally guaranteed is another indicator, but often customer service representatives will not have the answer and will not be willing to go to the trouble of getting the information.
Now, to answer the original question, “Can I file bankruptcy for my business but not personally?” In the vast majority of cases the answer is no. If your business is a sole proprietorship you will need to file a personal bankruptcy to address business debts. If your business is a corporation or LLC you will need to determine to what extent you are personally responsible for corporate or LLC debts. If the corporation or LLC files bankruptcy but you, as the owner, remain liable for substantial debts, then you are still forced to consider personal bankruptcy to deal with the problems.
At the Law Office of Michael Primus we have helped hundreds of business owners, and we can help you. If you live in Contra Costa, Alameda or Solano counties and have debt problems, contact us for a free in-office consultation. We have offices in Walnut Creek, Antioch, and Hercules.