Most people asking this question are concerned about whether they can continue to operate their business, and so we need to analyze two aspects: business assets and business debts. Before we can do that, we need to determine the legal status of the business entity. As always, bear in mind that the types of business entities and their nature will vary among jurisdictions, so it is important to speak to a competent attorney in your state who can analyze the specific facts of your case.
There are several types of business entities out there. Some examples include corporations, limited liability companies, partnerships, and a sole proprietorship. I’m going to over-simplify things just a bit here – for our limited purposes, all of these entities are identical except the sole proprietorship. The corporation, LLC, and partnerships are separate legal entities that exist separately from the individual(s) who formed it. The sole-proprietorship is not a separate entity – in other words, the individual is engaged in business and operates as the individual.
In the sole proprietorship, all of the assets of the business are the assets of the individual, because there is no separate legal entity. The business assets are listed on bankruptcy schedules along with the debtors’ other personal property and taken as exempt to the extent possible.
If the debtor is an owner of a separate business entity, then the debtor has a membership/stock/shareholder interest in the business. In that case, the business assets are totaled up, the business debts are deducted, and what remains is the net value of the business. The debtor will own that value or a percentage thereof, and that would be listed on schedules and taken as exempt to the extent possible.
As for business debts – again, because a sole-proprietorship business is not a separate legal entity, the debts incurred in the course of business are the debtor’s personal debts. To the extent they are dischargeable, they are included in the debtor’s bankruptcy. The business can continue to operate, because there never was any sort of entity to be shut down.
In the case of separate legal entitites, the business debts are the responsibility of the business, and are not included in a debtor’s personal bankruptcy. Business debts are still usually listed on schedules in case the debtor has made any personal guarantees – the personal bankruptcy relieves the debtor of any personal responsibility for the business debt, but the business remains liable. Again, business operations are largely unaffected in this case.
In order for a business to discharge its debts, it can either fold and/or file under Chapter 7. Filing a Chapter 7 will trigger liquidation and the cessation of business operations. Business entities are not eligible debtors in Chapter 13. If a business wishes to reorganize without stopping operations, it must file under Chapter 11.