Many of my bankruptcy clients are small business owners. Especially owners of one-person small businesses. People like the freedom of being their own boss, but it can be a tough way to make a living.
A lot of those small businesses are set up as corporations or LLC’s. Why? People have heard that they are not liable for the debts of their business if they set up a corporation or LLC. That’s true.
(Now starting out, nearly everyone you do business with will want you to sign a personal guarantee. So that protection doesn’t go as far as you’d like. And those personal guarantees for a lot of people are the reason for the personal bankruptcy.)
The advantage of setting up a corporation or LLC turns against you, if you have to file bankruptcy. Why? Just like you are not liable for the business’s debts, the business is not covered by your bankruptcy. You are not the corporation; the corporation is not you.
That hits home hard after the bankruptcy, when creditors keep sending bills, or even send court papers, in the name of your corporation or LLC. What to do?
Well, if the business is closed, do nothing! Go back to square one. Why did you set up the corporation or LLC in the first place? Because you are not liable for the corporation’s debts. So if they bill the corporation, you don’t care. If they sue the corporation, you don’t care. That was the whole point. You are not the corporation. You are not liable for the corporation’s debts.
Suppose you are still operating the business. Now that’s trickier. We need to talk about that in person. If you had a lawyer, accountant or business advisor when you set up the business, you need to go back to that person again, too. It’s really important to do that right.
But if you have closed the business, then it’s simple. You don’t care.
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