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L'etat, c'est moi: Bankruptcy and the small business owner

There is a stereotype about entrepreneurs that they are in perpetual motion, that they eat, sleep and breathe their business. The entrepreneur will give up everything to make that business a success, and that enthusiasm and sense of adventure are infectious. Everyone in the family believes this person can make it if anyone can.

What happens, though, if the market changes or consumers just aren't ready for the idea? No money is coming in, and the startup loans are past due. The family starts looking at the house and the car and their savings accounts, wondering how much they will be able to keep when the entrepreneur finally files for bankruptcy.

The family's assets may be protected in a business bankruptcy. A lot depends on how the business was organized and what the entrepreneur's plans for the future are.

Personal liability for business debts. Businesses, we know, come in all shapes and sizes. Some business types are appropriate for large businesses; some are better suited to small shops. Each type of legal entity contemplates the founders' or organizers' individual responsibility -- including financial accountability -- for the business.

For example, members of the board of directors of a public corporation are not personally liable for the company's debts. The same is true of a limited liability partnership or company -- the business, not the people in charge, is on the hook. In a plain old partnership, though, the partners are personally liable. That puts their personal assets -- the house, the car, the savings account -- at risk.

There is another thing that could put an entrepreneur's personal assets on the line. If the entrepreneur personally guaranteed company debt or cosigned a loan for the company, regardless of the type of company it is, the entrepreneur has just dissolved the protections of the corporate structure for that debt.

These are all issues that the entrepreneur considers up front. Some of those choices will matter when deciding which type of bankruptcy to file. There are other considerations, too. We'll get into all of this in our next post.


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