The Impact of Filing Bankruptcy on a Business
The self-employed are always concerned about the impact the filing for bankruptcy may have on their business. To answer the question, it first has to be determined if the business is a sole-proprietorship or its own entity- whether that be a corporation, partnership, or limited liability company. If the business is a sole-proprietorship, the assets of the business are also the assets of the individual. In that case, the assets will be protected only to the extent the individual has remaining exemptions to cover the value of the assets (exemptions are discussed in previous blog entries).
If the business is its own entity, then it is the value of the individual's interest in the business entity that is property of the bankruptcy estate. A balance statement will need to be prepared illustrating the net value of the entity. The balance statement will list all assets owned by the business and list all outstanding liabilities.
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The value of the assets will not be what the business paid for those assets; but rather what they would go for at auction - which is substantially less. Assets include cash-on-hand, machinery, inventory, equipment, accounts receivable, loans to principals, etc. Liabilities will include debt secured by the assets, accounts payable, payroll obligations, taxes owed, etc.
Is There a Net Value to the Business?
Quite often after conducting this analysis, there is not a net value to the business; thus, it is not of interest to a trustee appointed to administer the case. If there is a net value, then the individual's interest will have to be exempted or otherwise protected in his or her bankruptcy case. A more sophisticated business entity may have also included anti-alienation provisions in its organizational agreements that may prohibit the individual's interest from being transferred. If there is any question that there may be a value to the business, experienced bankruptcy counsel should be consulted with prior to filing bankruptcy.