Nothing prohibits you from starting a new business after filing for bankruptcy. But obtaining credit will be a problem if you start the new business soon thereafter. And, if you closed a similar business shortly before opening the new one, you might run into problems.
In this article, you'll learn about things to be aware of if you're opening a new business and you have a bankruptcy in your recent past.
Can You Keep the New Business Separate From Yourself?
After a business fails, it's not unusual to file an individual bankruptcy to get rid of your personal responsibility for business debt. For instance, business owners file personal bankruptcy regularly because of business debt incurred:
as a sole proprietor or partner in a failed partnership, or
on behalf of a limited liability company or a corporate entity after signing a personal guarantee (a promise to pay the debt if the company can't do so).
If this has happened to you, you already know how difficult it can be to keep your finances separate from those of the business, even if you organize the business as a corporation or limited liability company.
If you haven't been through this experience, you should know that even though these business entity types are supposed to remain wholly responsible for the debt, creditors know that new businesses fail with great regularity. As a result, a creditor will expect someone with interest in the company to agree to be financially accountable.
After a personal bankruptcy, your credit will likely take a hit, and you might not have as much in the way of income and assets. So, if you're starting a new business that requires significant capital outlay, you'll need to do careful—and possibly creative—financial planning. (Learn about starting a new business.)
Preparing for Financing Problems
You know to expect banks and other lenders to ask about your personal credit history when deciding whether to provide business financing. You might be able to increase your chances of approval by:
preparing a comprehensive business plan
opening the business with a partner with good credit
soliciting investors to fund your business
applying for financing from a small community bank, or
find financing or grants offered as incentives to business by local communities.
You might be thinking about turning to the small business administration for funding. If you are, exercise caution. Often, the small business administration requires not only a personal guarantee but will also expect you to use personal assets to secure the business debt—most commonly your home.
When Financing Isn't in the Cards
Just because you can't get financed doesn't mean you have to put aside your dream of working for yourself. You might want to consider:
starting a personal service business that requires little or no operating capital
working as a subcontractor for an established business to reduce your operating capital needs, or
taking advantage of one of the many other independent contractor opportunities afforded by the "gig" economy.
Here are a few other things you'll want to think about before starting your new business after bankruptcy.
Tax or employer identification numbers. If you closed a previous business, you can't start the new business with the same tax or employer identification numbers. You'll need to obtain new numbers.
Paying business taxes. Business owners maintain personal responsibility for business taxes. Avoid being stuck with a substantial bill by paying the business and trust fund tax debt The business collects trust fund taxes from others, such as payroll withholding and sales taxes (but usually not excise taxes) and must transmit the payments.
Extending payment terms to 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 can 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 good