When you file a business bankruptcy, the business entity matters. For example, the entity will determine whether business debt will get discharged (wiped out) in a Chapter 7 bankruptcy (sole proprietors, only), and whether your personal assets could be used to pay off business debt (sole proprietors and partnerships). However, before you get started, you’ll need to know who has the authority to file for bankruptcy on behalf of a particular entity type, because if an unauthorized person initiates the bankruptcy, the court can dismiss the petition.
Sole proprietor. A sole proprietor owns the business in its entirety and is responsible for paying the company debt. As the owner, a sole proprietor can initiate a business bankruptcy; however, the owner cannot file bankruptcy in the name of the business alone. The owner’s personal finances will be included in the bankruptcy.
Partnership. A partnership is similar to a sole proprietorship; however, more than one owner—or partner—exists. Like a sole proprietorship, general partners are personally liable for company debt, and a bankruptcy filing places the personal assets of the partners at risk. If the partnership appoints a managing partner, that partner can initiate a bankruptcy. If not, all partners must sign the bankruptcy petition; otherwise, the filing will be an involuntary petition. (For more information, read Can a Creditor Force a Business Into Bankruptcy?)
Limited liability company. An individual cannot own a limited liability company. Instead, a person—called a “member”—can hold an ownership percentage or unit of the LLC. The articles of organization list the ownership interests and name the managing members (the people who have authority to make decisions on behalf of the LLC). The articles must give the individual initiating the LLC’s bankruptcy the power to do so.
Corporation. As with an LLC, a corporation is a separate entity and can’t be owned by an individual. Instead, someone can obtain an ownership interest by purchasing shares of stock. The board of directors elects corporate officers to take certain actions on the corporation’s behalf. You’ll find the authority to file a corporate bankruptcy in the organizational documents. A shareholder cannot initiate a corporate bankruptcy, which can be problematic if the business is failing and an authorized officer can’t be found.
Each entity is treated differently in bankruptcy and, to prevent an unexpected outcome, it’s essential to understand these differences before proceeding forward. Because of this, you should always seek out bankruptcy counsel before filing a business-related bankruptcy matter.
(To learn how to determine whether you must file a business bankruptcy, read Should I File a Business Bankruptcy or a Personal Bankruptcy?)
Go to the main business bankruptcy FAQ page.