Starting a business requires a generous amount of two things: time and money. While some startups strike it rich (Google),Forbes reports that 90% of startups never get off the ground. Sometimes a failed startup can merely sell off its inventory, shut down its website and hand in the office keys. Other times, a company may find itself in dire financial straits. When your company cannot meet payroll, has no way to pay its vendors and has no idea where to get more funds, it may be time consider declaring bankruptcy.
Making the decision to declare business bankruptcy isn’t easy. There are a lot of questions to consider, not the least of which is whether you are truly prepared to close your doors for good or if there is a chance of financial recovery. It is also important to understand how filing for business bankruptcy will affect you personally.
If your company is a sole proprietorship, creditors are legally entitled to reach into your personal assets in order to satisfy the company’s debts. Let’s say, for example, that your company sells shoes and that you recently acquired $1000 worth of shoes from a supplier. You then make the decision to declare business bankruptcy and close your business for good and all. You sell your shoes to a liquidator for $500. Your supplier can demand that you use the money in your personal account to pay the remaining $500.
If your company is an LLC, odds are good that your personal assets will be protected if you file for business bankruptcy. An LLC essentially means that creditors can only go after the assets held by the company. Usually. Here’s the catch: even if your company is an LLC, you may still personally be on the hook for some of its debts. Banks frequently refuse to lend money to a start up without some type of personal guarantee from the owner. In this situation, the bank can expect you to use your personal resources to repay your debt.
If you believe your business is drowning financially, it is critical to consult with a lawyer before making the decision to declare bankruptcy and close your doors. A lawyer can help you consider all of your options and guide you towards making the decision that is best for you.