Business & Small Business Bankruptcy Issues in
California

Business bankruptcy information in California for small or large corporations, LLCs, patnerships and sole proprietorships.

Whether to file a bankruptcy for a business is one of the most frequently asked questions that I get.   This page is designed to answer common questions and explain common misconceptions about what filing a  bankruptcy can and cannot accomplish for a business entity.  For more information, please also visit my blog article on this topic.

First, one must determine what type of legal entity the business actually is.  Is it a corporation, partnership, joint venture, or simply a "dba"/sole proprietorship.

Sole Proprietorships/dbas/individual businesses

If the business is a sole proprietorship or husband and wife venture (meaning the business is NOT a corporation or a legally formed partnership), then it is NO different at all than yourself personally.  There is no legal separateness.  Thus, you need to look at the same options as you would for yourself personally (see information for Chapter 7, Chapter 13, or  Chapter 11).  In this situation, if you "file for your business", then you file for yourself personally as well, because they are one and the same.

Corporations, Partnerships, and LLCs

If the business is a corporation (including a Limited Liability Company) or partnership, then you only have two (2) bankruptcy choices.  Either Chapter 11, if you want to remain in business and reorganize the business' debt, or Chapter 7 if the business has or intends to stop operating and have its assets liquidated.

It is rarely, if ever, imperative that a corporation or LLC to file a Chapter 7 case.  It is important to understand that a corporation does NOT receive a discharge of its debts in a Chapter 7 case. 

So, why would a corporation file a Ch. 7?

There are several benefits to doing so.  If there are assets to be liquidated, it allows for an independent trustee to sell the assets and pay the creditors whatever is received, in their proper priority.  Essentially, it takes the corporation's officer(s) off the hook for doing this and limits their future liability in case any creditors complain about whether the assets were sold for the highest value, etc.  Another benefit is that it "informs" the creditors that there is nothing else to get from the corporation and the corporation is not going to be operating anymore.  This can prevent multiple unnecessary lawsuits against the corporation as the months and years go by.  Technically, the corporation's creditors can still sue the corporation even after the bankruptcy is over, but it would obviously be pointless.

One key concept that many people have difficulty understanding is this:  Filing a Chapter 7 or 11 for a corporation or LLC does NOT eliminate the personal obligations of the corporation's officers or principals at all (unless the corporation or bankruptcy trustee pays the corporate debts).   Therefore, if a corporate officer or partner has signed a personal guarantee for a corporate debt, or is otherwise obligated for a corporate debt (such as trust fund portion of  payroll taxes), then he or she will remain obligated after a corporate Chapter 7 case.  

So while there are benefits to filing a Chapter 7 for a corporation or partnership, relieving the officers of liability for pre-existing personal guarantees and obligations is not one of them.  Thus, if you are a corporate officer or owner and concerned about your PERSONAL obligations, you may need to consider a personal bankruptcy (chapter 7, 13 or 11) to deal with your liabilities.

In a partnership situation, if it is a general partnership, the General Partners are personally liable for ALL of the partnership debts.  This is a bit more complicated than can be covered here, but that is the basic concept.  Limited partners do not have unlimited liability (hence the name).

For additional information on this topic, see bankruptcy action's business bankruptcy section.





common misspellings: bizness, busyness, bankrupsy, bankruptsy, bancrupcy, bankruptsie