Businesses have only two chapters of bankruptcy available: Chapter 7 and Chapter 11.
For businesses, Chapter 7 (also known as a liquidation bankruptcy) is the going-out-of-business alternative to a Chapter 11 reorganization.
Certain business debtors do not prefer the prospects of liquidation, and in such instances Chapter 11 (reorganization) is best for them.
What types of businesses can file for bankruptcy?
Business bankruptcy law recognizes all four main types of businesses: corporations, LLCs, partnerships, and sole proprietorships. The first three types can file their own bankruptcy, independent of whether the owners file. However, as explained below, sole proprietorships cannot be filed as a “business bankruptcy” separate from a personal bankruptcy.
- Corporation:A corporation exists separately and apart from its owners, the stockholders. The bankruptcy case of a corporation does not put the personal assets of the stockholders at risk, although they may lose the value of their investment in the company’s stock. Note that the designations “C-corporation” and “S-corporation” are for federal taxation purposes only, and the distinction between the two is generally disregarded under bankruptcy law.
- Limited Liability Company:Like a corporation, an LLC exists separately and apart from its owners, the members. The bankruptcy case of a LLC does not put the personal assets of the members at risk, although they may lose the value of their investment in the company.
- Partnership:A partnership also exists separately and apart from its partners; however, the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case, or the partners may be forced to file for bankruptcy protection themselves. Partnership bankruptcies are fairly rare.
- Sole Proprietorship:A sole proprietorship, on the other hand, does not have an identity separate and distinct from its owner; accordingly, a bankruptcy case involving a sole proprietorship, by definition, can only be filed as a personal bankruptcy and necessarily includes both the business and personal assets of the owner-debtor.