How can business owners avoid personal bankruptcy?

Businesses are started to generate a profit. However, not all ventures are immediately successful, and sometimes a business owner’s best option is to file for bankruptcy. Whether the business owner needs to file for personal or business bankruptcy is a complex question that depends on several factors.

The most important factors in determining whether a business owner needs to file for a personal or business bankruptcy is how the business is set up and whether the debt obligations of the business are in the business’ name or the business owner’s name.

Some business types create fictional entities that are separate from the people who start the business. This includes limited liability corporations, limited liability partnerships and corporations, among others. When these businesses need to file for bankruptcy, the debt holders cannot typically come after the business owner’s personal assets unless one of the following applies:

  • The debt is for certain trust fund taxes, such as taxes that were withheld from an employee’s paycheck.
  • The debtor can pierce the corporate veil. The corporate veil is a fictitious shield that protects business owner’s personal assets. Creditors can pierce the corporate veil in a number of ways, one of which is by showing that the business was an alter-ego of the business owner.
  • The debtor can establish a claim of fraud.
  • The business owner made a personal guarantee to the debtor by collateralizing their personal assets.

By putting a company through a Chapter 7 bankruptcy, many of the debtors will be paid off, potentially eliminating any claims against the business owner. However, if a creditor is not paid off, they may still have a claim against the business owner. If the business owner is not able to satisfy this claim, then they may need to consider a personal bankruptcy.

There are many issues that can come up when liquidating a business, and a business owner’s personal finances are frequently a concern. To learn more about business and personal bankruptcies, contact the dedicated Georgia bankruptcy attorneys at Morgan & Morgan, P.C.

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