One risk that small business owners take when setting up their Louisiana business as a sole proprietorship is that their personal and business finances will be intertwined. That means they could end up being personally responsible for any unpaid debts belonging to the business.
The reverse is also true. If you set up your business as a sole proprietorship and get into serious personal debt, how you handle it could determine whether or not your business remains afloat. There are many impacts that filing for personal bankruptcy can have on your business if it’s a sole proprietorship.
1. You could lose many of your business assets
If you file Chapter 7 bankruptcy (also known as liquidation bankruptcy), any assets that aren’t exempt can be liquidated to pay your debts. Business assets are typically non-exempt. That means you could lose inventory, equipment and other things you need to run your business.
2. You may have to lay off employees
If you have to downsize your business considerably, you’ll likely have to lay off many if not all of your employees. You probably won’t have enough revenue coming in to pay them and there may not be enough work for them to do.
3. Your credit rating will be damaged
You likely won’t be able to get a business loan or even be able to lease vehicles or equipment to continue to operate. Since bankruptcy will affect your personal credit score for years, if you own a sole proprietorship, your business credit rating will also be affected.
4. You may choose to change your business structure
If a business is incorporated or is a partnership, it’s generally safe from an owner’s personal bankruptcy. You may be able to change the structure of your business after filing for personal bankruptcy. However, people may be hesitant to go into business with you.
What if you file for Chapter 13?
Because Chapter 13 bankruptcy allows you to reorganize your debts and develop a repayment plan rather than having to liquidate your assets, it may be possible to file for a Chapter 13 bankruptcy and retain your business. Retaining your business may allow you to use the revenue you continue to earn from the business to repay your debts.
Saving a sole proprietorship while filing for personal bankruptcy comes with considerable challenges and a lot of decisions. The best first step is often to seek legal guidance. Either a Chapter 7 bankruptcy lawyer or a Chapter 13 bankruptcy lawyer can help you determine your best choice given your specific situation.