Sometimes despite a small business owner's best efforts, their business fails. There are a lot of reasons why a small business may have trouble getting its footing financially. Economic downturns, increased competition, or just a change in how business is conducted can lead to bankruptcy in a short amount of time. While filing for bankruptcy is certainly something that business owners want to avoid, sometimes it is the best decision. Here are three things that small businesses need to consider when filing for bankruptcy.
Sole-Proprietorship Or Corporation?
When it comes to filing for bankruptcy, things may be different depending on whether the business is owned by a sole proprietor or by a corporation. The business is a legal extension of the owner when there is a sole proprietor. Corporations are legal entities that are separate from the owner. This is something to consider because it has impacts on what type of bankruptcy can be filed. There is no legal separation between a sole proprietor and their business so they have to file for bankruptcy personally. Sole proprietors can file for Chapter 7, 11, and 13 bankruptcy. Corporations or partnerships can only file for Chapters 7 and 11.
Type Of Bankruptcy
When it comes to business bankruptcy, there are a few different options. Chapter 7 is usually reserved for the worst case scenario. This is the type of bankruptcy that should be filed whenever the business is completely done and there are little to no assets remaining. Chapter 11 bankruptcy is where the company is allowed to reorganize and continues business. This type of bankruptcy can be complex and involves coming up with a payment plan for the creditors. Chapter 13 is something that can be filed by sole proprietors in order to protect some of their personal assets. Chapter 13 bankruptcy often involves a payment plan for debts as well.
Filing for bankruptcy is often a last resort for business owners. Many are also dismayed to find that it can be pricey. Chapter 7 bankruptcy can cost anywhere from $1,000 to $5,000 to file using a bankruptcy attorney and chapter 11 can cost anywhere from $25,000 to $50,000 for a small business. Chapter 13 costs can vary but most pay between $2,500 and $3,500 in attorney fees. The cost of filing for bankruptcy is something that a small business should try to budget for.
Filing for business bankruptcy is something that many small businesses dread. However, due to a variety of circumstances, it's something that many small businesses find themselves needing to do. Small businesses should look into what types of bankruptcy their owners are allowed to file, choose the type that works best for the business, and also factor in the cost of hiring an attorney to file for bankruptcy on behalf of the business.