One important question to ask when you’re financially cleaning up after a failed business: can the business file a bankruptcy without you?
Many factors go into the decision about whether your failed or failing business or you should file bankruptcy. Today we address only the very beginning of this process: is your business ELIGIBLE to file bankruptcy on its own?
Is Your Business Its Own Legal “Person”?
Your business can only file its own bankruptcy if it is a legally recognized business entity, a legal “person” distinct from you. If you established and ran the business under a formally registered corporation, that corporation can file a bankruptcy. If you established and ran the business as a formal partnership, that business partnership can file a bankruptcy.
In contrast, if you operated the business under your own name, or under a “dba” (“doing business as”), that business is not legally separate from you as an individual. So it is not its own legal person and so it cannot file a bankruptcy.
That’s true even if you legally registered that “dba” name with a state agency (usually with the “corporation division” of your secretary of state’s office), paid for a local business license, and/or had separate bank accounts for the business. That business is legally just a part of you as an individual and cannot file its own bankruptcy.
But what if your business was established as a corporation but over time you did not keep the corporation’s finances distinct from your own? What if you operated your business in fact as a partnership of three partners and kept distinct partnership books but never formalized the partnership through the state or local authorities? Whether corporations or partnerships with these kinds of complications can file a bankruptcy depends on the circumstances, and you need to discuss your unique situation with an experienced business bankruptcy attorney.
Corporations and Partnerships Cannot File Chapter 13
Chapter 13 “adjustment of debts” is reserved for “individuals”—single and married human beings, not corporations or business partnerships.
Corporations and Partnerships Can File Chapter 7, 11 and 12
Legal business entities like corporations and partnerships can file under Chapter 7, called “liquidation” or “straight bankruptcy,” to help with the orderly liquidation of the business’ assets and the fair distribution of the proceeds to the business’ creditors. Such a Chapter 7 may not be necessary or worthwhile if the business does not have any of its own assets, other than those which are collateral on secured debts.
Under a Chapter 11 “business reorganization,” the business would continue to operate or be sold as a going concern. Although most bankruptcy courts make an effort to run small business Chapter 11 cases efficiently, they are still very expensive to file and process—usually at least tens of thousands of dollars in court, U.S Trustee, and attorney fees. So Chapter 11 is often not a practical solution for very small businesses.
Under a Chapter 12 “adjustment of debts of a family farmer or fisherman,” the family farming or fishing operation would continue operating. To qualify that operation must meet certain maximum debt limits, and other qualifications to show that it is sufficiently oriented towards farming or fishing and is sufficiently family-owned.
Whether a business CAN file its own bankruptcy leads to the question whether it SHOULD do so, to be covered in the next blog post.