Unique Challenges for Small Businesses

Small businesses fail for various reasons, including many beyond the owner’s immediate control. It’s a reality of entrepreneurship: Not every new business will succeed, and sometimes even long-standing companies hit hard times. You have often financed the business from your personal savings or with family loans. It can hard to admit the business is failing.

Bankruptcy is an option when a debt-laden business is failing, but it’s not always the right one.
Even when it is the best choice, there are multiple types of bankruptcy filings, each with its own advantages and disadvantages. And importantly, sometimes the bankruptcy can wipe away enough debt to actually keep the business afloat.

First, you have to determine if your small business is set up as a separate legal entity. This means you have a limited liability company (llc), corporation, or a partnership. You would have registered the company with the State Corporation Commission of the state where it was set up as a separate legal entity.

If you just operate your business under a trade name or a “doing business as” name, your small business is not a separate legal entity. In that case, your bankruptcy options are really personal, as you are personally responsible for all the debts of the business. You cannot just file bankruptcy on the “business” debt if there is no separate legal entity. It is critical if you are self-employed or using a trade name to talk to an attorney about your options. Understanding the basics can help reduce some of the fears and misconceptions that surround the word bankruptcy. Sitting down with an attorney to review options will help you understand your choices.

If you do have a separate legal entity, then you have to consider your goals for yourself and the business. If you simply wish to shut down the business, you can often accomplish that without the cost and legal fees associated with a bankruptcy. And, many times, there are benefits to not filing bankruptcy.

In evaluating whether a bankruptcy is worthwhile for a separate legal entity, it is important to know what debts of the business entity the owner may owe personally. These would be debts that the business owner personally guaranteed, such as bank loans or leases. Most credit cards for a business are issued under the owners’ personal social security number and contain a personal guarantee. And, if the business owes certain types of taxes (employee taxes, sales taxes, and certain others) those liabilities can pierce the corporate veil and carry over to the company owners individually.

If you are personally responsible through guarantees for much of your business’ debt, then you need to understand a business bankruptcy does not eliminate your personal liability. We find that most of the time the owners need to file a personal bankruptcy and let the business simply be closed without filing a bankruptcy.

It is important to consult with a qualified bankruptcy attorney to discuss how your business is set up, the impact of a filing on the business and you personally, and make smart choices about how to proceed. Getting good legal advice can help you avoid complications and mistakes as you move forward and just might help you keep the business afloat.

We have offices conveniently located in Roanoke, Martinsville, and Blacksburg. Call and schedule your consultation with us today!

Roanoke: 540-981-9000
Blacksburg: 540-961-2000
Martinsville: 276-632-7000