Sole Proprietors and Corporations In Bankruptcy
There are some important differences in the way bankruptcy courts treat sole proprietors versus corporations.
Let's take a look at a few:
Individual vs. Corporate Entity
The bankruptcy trustee will view a sole proprietor's business assets the same as their personal assets for the purpose of repaying creditors. This means that business assets might suffer liquidation to pay off personal debts. On the other hand, the corporation is viewed as totally separate from the individual debtor so its assets are also seen as separate. A corporate debtor can file personal bankruptcy without endangering the assets of their incorporated business.
Ownership Of Business
A sole proprietor is treated as the sole owner of the business (unless officially noted as a partnership). And the bankruptcy court will take control of the business making it part of the bankruptcy estate. A matter of fact, if the debtor files Chapter 7 bankruptcy the bankruptcy trustee may even request that the business is closed. If a debtor files bankruptcy and partly owns a corporation, only the shares they own will become part of the bankruptcy estate. Other owners may even have the opportunity to buy out the shares so they can protect their interests and not be negatively impacted by the bankruptcy.
One of the benefits of being a sole proprietor is that the debtor can file Chapter 13 bankruptcy and repay both their business and personal debts as long as the consumer debts comprise at least 51 percent of the debts they owe. Corporations who want to restructure their debt may need to file Chapter 11 bankruptcy, which can cost more in time and money.