Area of Law: Credit, Debt and Bankruptcy
Answer # 0280
Effects of bankruptcy on small business owners vs corporationsRegion: Ontario Answer # 0280
Sole Proprietorships and Partnerships
The effect or ramifications of business bankruptcy depends on whether the business is a sole proprietorship, a partnership, or a corporation.
If your business is a sole proprietorship or a partnership, it is important to recognize that the bankruptcy of your business will result in your personal bankruptcy as well. Legally, the partners , or sole proprietors are considered to be the business. In other words, the business and the owners are considered to be one entity under the law. As such, all assets of the business are personally owned by the partners or sole proprietor.
As a result, the owner’s personal assets are included in the bankruptcy and could be sold to satisfy business debts. In addition, the business bankruptcy would:
- appear on the owner’s personal credit report, and
- have the same effect as a personal bankruptcy on the owner’s credit rating and credit score.
Partnerships with two partners
When one individual in a partnership made up of two individuals declares bankruptcy, the partnership can no longer exist.
Partnerships with more than two partners
When a partnership includes more than two individuals and one declares personal bankruptcy, the partnership may continue to operate if they enter into an agreement.
If your business is a corporation, your business can go bankrupt without involving your personal assets, unless you have personally guaranteed a loan or you are a director and the company has failed to make payments, such as the Harmonized Sales Tax (HST), or remit employee source deductions. Before filing for bankruptcy, make sure you fully understand the effect of your business’ bankruptcy on your personal situation.
During a business bankruptcy, business owners sometimes have an opportunity to buy back the business equipment and start up the business all over again, free of most debts. However, a deliberate failure with a view to buying assets back could be fraud and have criminal sanctions.
General Security Agreements
When a business goes bankrupt, your Licensed Insolvency Trustee (LIT) takes all the assets and sells them to pay off as many of the debts owed to the creditors as possible. Often, a business will have a secured creditor with a General Security Agreement. This type of Agreement provides creditors with a security interest in the debtor’s personal property, including its business inventory, equipment, accounts receivable and so on. If the business has a secured creditor, such as is often the case with a bank, a Receiver will usually be appointed to conduct the sale of the assets that are secured, and the LIT will merely monitor matters on behalf of unsecured creditors. Secured creditors will receive payment on secured assets in priority to unsecured creditors. The sale of assets is generally done through some form of public sale process, such as a solicitation of bids, tenders or auction, although private sales are also common.
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When you are in a situation of financial difficulty, there are many options to consider before filing for bankruptcy. For easy-to-understand debt solutions on your terms, contact our preferred experts 4Pillars and rebuild your financial future. With 60 locations across Canada, they will help you design a debt repayment plan and guide you with compassionate advice. No judgment. For help, visit 4Pillars or call toll-free 1-844-888-0442 .
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