If you own an incorporated business, but you are thinking about filing for personal bankruptcy, you’re probably wondering if personal bankruptcy will mean small business bankruptcy as well. After all, your business has the potential to bring in long term revenue, so it makes sense to keep it running post-bankruptcy if at all possible.
Most people think that a personal bankruptcy won’t impact an incorporated entity. The main reason you incorporated your business was to insulate yourself from business liability, right? If incorporation protects you from corporate liability, wouldn’t it make sense that it would also protect the business from your actions as well?
Unfortunately, this is not the case. Your corporation is not insulated if you file for bankruptcy protection. You technically do not own the assets of the corporation, but you do own the company’s stock – which is just the rights of ownership of the business. When you file for personal bankruptcy, the ownership of the stock will transfer to the estate – meaning that you no longer own the business.
Once the estate becomes the owner of the stock, the trustee can liquidate the assets of the company to pay your creditors. This usually means that the company will be forced to cease business operations – just as if you had filed for small business bankruptcy.
You will have the option of repurchasing the stock from the estate, which will allow your business to continue operating. The repurchase price will be set at the fair value of the stock – that is, its liquidation value. Many personal bankruptcy filers choose to do this, because the liquidation value of the stock is often low compared to the ongoing profit potential of the business.
Before you file for personal bankruptcy, take the time to determine the fair value of your corporate stock. This will tell you how much cash you will need to buy back your business from the estate after filing bankruptcy.
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