Chapter 7 Bankruptcy And Sole Proprietorship: The Only Way To Discharge All Debt

When you own a small business, the only way can eliminate business debt without having to liquidate all of your business' equipment and holdings is with a Chapter 7 bankruptcy. However, as a bankruptcy attorney will inform you, there are some very strict rules to this procedure. The most important thing you can do prior to starting your small business is to investigate how to eliminate business debt in the event that you get in way over your head.

Small Business Classifications

Some entrepreneurs classify their business as an LLC, or limited liability company, for tax purposes. You may also choose a sole proprietorship, if you do not have any employees or have less than ten employees. The most important aspect of how you choose to label your company is how it will affect your debt load and debt elimination, should you be faced with bankruptcy later on. In this case, a sole proprietorship is your best option.

Why Sole Proprietorships Get Bankruptcy Breaks

Sole proprietorships are owned by a single person, and often operate out of the business owner's home or a rented office space. This means that you invest your own money into your business, maybe put your house or car up for collateral when you need a start-up loan. Because this debt is tied to your personal assets, you cannot lose your home or car to pay the debts. Instead, your Chapter 7 bankruptcy eliminates your business and personal debts all at once.

What Happens If You Label Your Small Business as Something Else

Only sole proprietorships get this kind of bankruptcy break. If you labeled your small business as an LLC, a partnership or a corporation, the amount of debt invested in your business is strictly business debt. You and your business partner or board of directors are liable for the business debt, and cannot discharge any of it through personal bankruptcy, nor can you discharge personal debt through business bankruptcy. If you have to file bankruptcy for an LLC, corporation or partnership, you lose everything related to the business as you will be forced to liquidate it all.

Additional Advice from a Bankruptcy Attorney

It is never too late to change the type of business you have to a sole proprietorship. Your business will have to make several adjustments in order to qualify for the switch, such as buying out your partner's share of the business in a partnership, or moving your business assets over into your personal assets column for tax purposes when you have an LLC. These are complicated moves, but a tax professional and/or a bankruptcy attorney can help you make the transition. Then, if you ever need to, you can file for a Chapter 7 bankruptcy, discharge all debt, but keep everything you purchased to operate a business.

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