If you own a small business and are considering personal bankruptcy, one of the first questions on your mind is probably what happens to your company. The answer largely depends on your business structure.
Whether you operate as a sole proprietorship, an LLC or a corporation determines how much of your business a bankruptcy trustee can reach when you file personally. Getting clear on that before you file can make a significant difference in what you keep and how your business survives the process.
What happens to a sole proprietorship in a personal bankruptcy
When you run your business without incorporating or forming an LLC, the law sees you and your business as one. When you file a personal Chapter 7 bankruptcy, the trustee can reach both personal and business assets, but you can also discharge both in a single filing.
California exemptions, including a tools of the trade exemption, may protect the equipment and materials you use in your work. If your business is service-based, such as consulting or freelancing, the trustee generally cannot sell the business itself because its value is tied to your future labor.
Many sole proprietors are able to continue operating after filing, particularly when business assets are modest or fully exempt.
What happens to an LLC or corporation when the owner files personally
If your business is structured as an LLC or corporation, a personal bankruptcy filing does not directly touch the business assets. What the trustee can reach is your ownership interest, which they could potentially sell to satisfy creditors. If the business carries significant debt or depends entirely on your personal involvement, the trustee may abandon that interest as not worth pursuing.
Two situations where the structure does not fully protect you. If you personally guaranteed business loans, those obligations remain yours, though personal bankruptcy can discharge that personal liability. If you have been mixing personal and business finances, the trustee has stronger grounds to argue the separation is not real.
What small business owners in California should consider before filing
Before filing, it helps to get a clear picture of your business’s value and what exemptions may apply. California gives filers two sets of bankruptcy exemptions to choose from. Choosing the right one can significantly affect how much of your business you protect.
Speaking with a California bankruptcy attorney before you file gives you the clearest picture of your options and helps you avoid decisions that could put your business at unnecessary risk.