The Moher Law Group assists with Business Bankruptcy reorganizations in California for small or large corporations, LLCs, patnerships and sole proprietorships.
Whether to file a for a corporation business is one of the most frequently asked questions that we 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 contact me directly for a free consultation on reorganization options for your business.
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 individual business (meaning the business is NOT a corporation or a legally formed partnership), then it is legally no different than yourself. There is no legal separateness. Therefore, 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 bankruptcy choices. Either filing a Chapter 11 case if you want to remain in business and reorganize the business’ debt, or filing a Chapter 7 case if the business has or intends to stop operating and have its assets liquidated.
It is rarely necessary that a corporation or LLC 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. However, there may still be valid reasons for filing a bankruptcy under these circumstances.
So, why would a corporation file a Chapter 7 for its Business?
There are several benefits to doing so.
1. 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 officers 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.
2. 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.
3. It may shield the owners of the corporation from future liability to shareholders and other creditors if the Chapter 7 Trustee does not find any wrongdoing (such as transfers of money to officers outside the ordinary course of business, etc.).
One key concept that is essential to this evaluation is that 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 then he or she will remain obligated after a corporate Chapter 7 case. It is best to address all issues, corporate and personal, at the same time for a full reorganization and fresh start.
Contact us today to see how bankruptcy might be able to help your business, and to discuss all legal options for your particular situation.