Starting a New Business After Bankruptcy

Tips for getting credit and setting up a new business after you have filed for bankruptcy.

Nothing prohibits you from starting a new business after bankruptcy. In fact, you might be able to apply some lessons learned from your prior financial problems to the new business. Of course, if you start the new business soon after your bankruptcy, it might be difficult to obtain credit. Here are some business tips when you have a bankruptcy in your recent past.

Keep the Business Separate From Yourself

If you were forced to file for bankruptcy because of business debt you incurred as a sole proprietor or a partner in a failed partnership, consider using a different form for your new business, such as a corporation or and limited liability company.

The benefit of taking this new approach is that these types of business entities are wholly responsible for the debt. Of course, if you sign a personal guaranty for a business debt (a promise to pay the debt if the company can't do so), this benefit will be lost and you'll take on the business debt as your own, just as you would as a sole proprietor.

(To learn more about different business structures, go to the Business, LLCs, and Corporations Center.

Getting New Tax or Employer Identification Numbers

If your prior business was a sole proprietorship and part of your personal bankruptcy or if you liquidated a prior corporation or limited liability company in Chapter 7 bankruptcy, you can’t start the new business with the same tax or employer identification numbers. You need to obtain new numbers.

Keep in mind, however, that a corporation or a limited liability company cannot receive a discharge in Chapter 7 bankruptcy. The business continues to owe the debt. Therefore, if you restart the business (or even a similar business under a different name), an old creditor can still take action to collect a debt that wasn't paid in full in the bankruptcy.

Preparing for Financing Problems

Even if you start the new business as a corporation or limited liability company, if you are the sole shareholder, banks and other lenders will likely ask about your personal credit history when they consider providing financing to the business. You could take some steps to increase your chances of having the business approved for financing by:

  • preparing a comprehensive business plan
  • opening the business with a partner that has good credit
  • finding investors to partially fund your business
  • applying for financing from a small community bank, or
  • looking for financing or grants offered as incentives to business by local communities.

Small Business Administration Loans: Use Caution

While turning to the small business administration might sound like a good idea, exercise caution. Often, the small business administration requires not only personal guarantees for loans, but also requires you to use personal assets, most commonly your home, to secure the business debt.

Consider Financing Alternatives

Traditional financing from a bank isn't the only way to go. Additionally, you might want to consider:

  • soliciting investors to fund your business
  • starting a personal service business that requires little or no operating capital, or
  • working as a subcontractor for an established business to reduce your operating capital needs.

Paying Business Taxes

Business owners maintain personal responsibility for business taxes. To avoid being stuck with a large bill, you'll want ot make sure that the business pays its tax debt timely and, most importantly, clearly identifies and pays to the property taxing authority any “trust fund” taxes. If you don’t, you may end up being personally liable for the taxes.

Trust fund taxes are the taxes that the business collects from others, such as payroll withholding and sales taxes (but usually not excise taxes). The business has the responsibility to collect and transmit the payment but is not directly paying the tax.

Be Careful About Extending Payment Terms to Your Customers

Since financing will be tight in the beginning, make sure that your new business is getting paid for the work it is doing. Extending payment terms to customers that are overly favorable might result in not getting paid at all.

Maintain Good Business Records

If you are able to secure financing, it is likely that it will be on a short-term but renewable basis. Keep good records so that when the loan is up for renewal you can provide accurate figures to show that your business is succeeding and building up its own good credit.

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