Can I File for Bankruptcy If I Own a Business?

Learn why you can file a bankruptcy case, but might lose your business.

Nothing in the law says that a business owner can’t file a bankruptcy case. But the real question is whether you’ll still own that business after it’s over. The answer? It depends. Factors, such as how you organized the company, what it does, and whether you can exempt (protect) your ownership interest, will determine its fate.

What Type of Business Is It?

To know what will happen to the company overall, you’ll start by looking at its formation.

  • Sole proprietorship. If you haven’t incorporated your business, you probably own it as a sole proprietor. In a sole proprietorship, the business is an extension of you, and might be described as Dale Franklin, doing business as (d/b/a) Frank’s Fine Furniture. You own the assets of the company, such as the vehicles, lawn and gardening equipment, customer lists, and the company’s debts are your debts. When you file a bankruptcy case, you will list all of the company’s assets and debts as your own.
  • Partnership. If you own your business with other people, but the business isn’t incorporated, you likely own it as a partnership. You’ll list all of your personal assets and the partnership itself as a business asset when filing for bankruptcy. As a caveat, filing bankruptcy when you own a partnership can affect all of the partners’ business and personal assets, even if they aren’t in bankruptcy.
  • LLC or corporation. If your company is incorporated, you own interest in the company, not the company itself. You might own 100% of the stock or share ownership with other stockholders. Even if you own 100%, the company owns its assets and is liable for its debts. When you file a bankruptcy case, you will disclose the stock as your asset, not the company’s assets or liabilities. (If you’re separately liable on company debt as a co-borrower or guarantor, you’ll include that debt).

Can You Keep the Business?

Two factors will likely determine whether you’ll lose your business—the value you can protect and whether the company is dependant on your skills.

Protecting Assets

You can protect some of the property that you own from the reach of the bankruptcy court and your creditors using the property exemptions allowed by your state. In most states, there's no specific exemption for corporate stock; however, you might be able to use a wildcard exemption that allows you to protect any property of your choosing. Not all states have a wildcard exemption, however.

You might be able to protect a portion of the company’s assets as “tools of the trade,” if that exemption category is available. This exemption covers a certain amount of property that you need in your trade or profession.

Remaining Value

In every Chapter 7 case, a bankruptcy trustee appointed by the court will carry out a duty to liquidate the assets that you can’t exempt, then distribute the proceeds to your creditors who file valid claims. Sometimes an asset isn’t exempt, but its value is so small that liquidating it would be a burden.

Another business may lose its value if you aren’t associated with it any longer. In general, the trustee won’t have much interest in a sole proprietorship except for the assets that can be sold. If the business is incorporated, the trustee will be more interested in selling the stock if the company’s value doesn’t depend on your continued involvement.

Example 1. You own an unincorporated business called Frank's’ Fine Furniture. You're a carpenter who builds custom furniture. You own your tools, a small wood shop, a pickup truck, and the materials from which you craft your custom pieces. Your tools are exempt, but the rest of the business assets are not. Because it’s a sole proprietorship, the trustee can’t sell your interest in the company, but he can liquidate the nonexempt assets.

Example 2. Frank’s Fine Furniture is incorporated. You own 100% of the stock, and you estimate that the company has assets worth about $20,000. But, without you designing and building the furniture, Frank’s Fine Furniture has no additional value. The trustee can sell the stock; however, the value of the business won’t include your expertise, and will likely be worth $20,000.

Example 3. Frank’s Fine Furniture is incorporated. You own 100% of the stock. The company has 25 employees, hard assets, like machinery, real property, and vehicles, worth $10,000,000, and annual revenues of $3,000,000. You no longer design or craft the furniture yourself. The trustee will sell your interest in the company (the stock) at full value because it no longer depends on your talents or good name.

Speak With an Attorney

When you own your own business, filing for bankruptcy is even more complicated than usual. Not only do you need to understand what will happen to your company, but you’ll likely have to provide financial information for you and the company. To ensure you’re doing what’s best, consult with a bankruptcy attorney who will help you evaluate what you stand to lose, as well as discuss any alternatives available.

If you’d like to know more, start by reading Chapter 7 v. Chapter 13 for Small Business Owners and Chapter 11 Bankruptcy for Small Business Owners.

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