Starting a business is a risky venture, and unfortunately, not all of them succeed. If your business is having financial troubles, you might wonder: Will I lose my personal assets if my business fails and I file bankruptcy?
The answer to this question depends heavily on your current business structure. If you are a sole proprietor and file for bankruptcy, creditors can come after your personal assets, such as your home or car. If you are in a corporation or an LLC, your personal assets may be protected, but whether creditors can reach them depends on a variety of factors.
Two Types of Bankruptcies for Businesses
In general, there are two types of bankruptcies for businesses: Chapter 7 and Chapter 11:
- Under Chapter 7 bankruptcy, the business liquidates its assets to pay for its debts. This option is ideal for businesses that want to end operations.
- With Chapter 11 bankruptcy, or reorganization bankruptcy, the business reorganizes its assets and creates a payment plan to pay off its debts.
Chapter 7 is the most common type of bankruptcy for businesses because Chapter 11 is a more expensive and complicated process. A commercial bankruptcy attorney can help you decide which option is most suitable for your business.
Filing for Bankruptcy as a Sole Proprietor
If you are the sole proprietor of your business, you and your business are the same legal entity, which means your personal and business assets are the same, even if you operate under a different assumed name. When a sole proprietor files for Chapter 7 bankruptcy, creditors can come after their personal assets as they are also the business’s assets.
This does not, however, mean that sole proprietors will necessarily lose all their personal assets if they file for Chapter 7. Pennsylvania allows individual owners to use either state bankruptcy exemptions or federal bankruptcy exemptions to protect some assets from liquidation, including home equity, assets necessary for business, and some retirement accounts.
Filing for Bankruptcy as an LLC or Corporation
LLCs and corporations are separate legal entities from their owners, so creditors can usually only come after business assets, not an owner’s personal assets. When an LLC files for Chapter 7 bankruptcy, a trustee sells off business assets to repay creditors. Since the business’s and owner’s assets are separate, the trustee can generally only sell business assets.
There are some instances in which an LLC owner can be personally liable for business debts, for instance if:
- They personally guaranteed business debt.
- They did not separate business and personal assets.
However, the attorneys at the Cooney Law Offices have developed effective strategies for these situations.
Full-Service Business Support from an Attorney in Western PA
If your business is facing bankruptcy, our attorneys can help you figure out the best way to protect your assets and interests. Contact The Cooney Law Offices online or call 412-546-1234 today for a consultation with a business law attorney in Western Pennsylvania.
