As a small business owner, you are often the designer, the salesperson, the accountant, the marketer, and the customer service specialist. With all these different hats, it is no wonder many small business owners get burned out. Burnout can lead to neglecting your business, and that can affect your bottom line. According to Business Insider, 20 percent of small businesses fail within the first year and 50 percent fail by year five.
You may wonder what to do if your small business is losing money. You could ask yourself if filing for bankruptcy is the wisest course of action. It may be, but that also may depend on your type of business and the specific situation.
The type of business matters
A sole proprietor is personally liable for the debts of business. That means your home, vehicle or other assets may be confiscated to pay off the debts of the business. Filing for bankruptcy is a possible way to protect these valuables from seizure.
If your business is a limited liability company or LLC, it might be wisest to shut your doors, rather than file for bankruptcy. As an LLC, you have limited liability for business debts. Your personal assets should not be subject to seizure. However, there are some exceptions to this rule.
Perhaps, you were not careful about keeping your personal and business expenses apart. In that case, the court could decide there is no separate business entity. That means even as an LLC, your personal property could still be at risk. Your personal assets might be at risk if a bank asked for personal collateral when you applied for a loan. This personal collateral could potentially be seized.
If you decide to file for bankruptcy
Chapter 11 bankruptcy is usually reserved for large companies, particularly if the companies are publicly-traded. As a small business owner, you are more likely to file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is generally pursued if you want to close the business and liquidate the assets. The benefit of filling for Chapter 7 is your qualifying business debts are wiped away. If you are a sole proprietor, Chapter 7 also eliminates your qualifying personal debts. There are certain kinds of debts that will not be discharged. Chapter 7 also involves the seizure of your assets. Though you may be allowed to keep certain assets.
However, if you want to keep your business running, Chapter 13 is probably the best way to proceed. With Chapter 13, you establish a repayment plan that may allow the business to stay open and possibly succeed. The payments will likely be smaller than the payments you were making previously.
Sometimes, the court makes the decision for you. If your business has low income and few assets, the court may recommend you file for Chapter 7 bankruptcy. Higher income and more assets could sway the court to choose Chapter 13 bankruptcy for your business.
Wherever you fall on this spectrum, you may consider talking to an attorney experienced in handling bankruptcy cases. An attorney can help you decide what option is right for you and your business.