What Are My Bankruptcy Options as a Florida Small Business Owner?
The COVID-19 pandemic has put many Florida small business owners in an impossible situation. As consumer demand has fallen while bills continue to mount, many businesses plan to close their doors permanently. But what does this mean from a legal standpoint? For example, does a small business owner need to file for bankruptcy? And how does that differ from filing for personal bankruptcy?
Sole Proprietor vs. LLC or Corporation
Bankruptcy actually works differently depending on the type of business structure involved. If you are a sole proprietor–that is, there is no legal distinction between you and your business–then you can simply file for Chapter 7 bankruptcy to obtain a discharge of most of your personal and business debts. But if you organized your business as a limited liability company (LLC) or a corporation, things are more complicated.
Basically, even if you are the sole owner of an LLC or corporation, what you own is an interest in the business rather than the actual business assets. So by filing for Chapter 7 bankruptcy, those assets then become the property of a court-appointed bankruptcy trustee. Under Chapter 7, there is no mechanism for your business to continue under the trustee, so the business assets are simply liquidated and used to pay back any business creditors. There is no discharge like there is with a personal bankruptcy–the Chapter 7 proceeding simply closes the business.
It is also worth noting that in some cases, the individual owner of an LLC or corporation may still be personally liable for certain business debts even after a Chapter 7 liquidation. For example, if your business had employees and you failed to withhold federal income tax from their pay, the government could try and hold you personally liable for that money. Private creditors may also argue your business entity was a “sham” and seek to pierce the corporate veil so they can go after your personal assets. Additionally, if you signed a personal guarantee for any business debt, such as a bank loan, that obligation is not discharged or affected by having the business entity file for Chapter 7.
Chapter 7 vs. Chapter 11
Of course, if you have a separate business entity that may still be viable, you always have the option of filing for Chapter 11 bankruptcy instead of Chapter 7. Unlike a Chapter 7 liquidation, Chapter 11 allows the business to keep its doors open while attempting to “reorganize” its debts. You can remain in control of the business under the supervision of a bankruptcy trustee. At the same time, you are required to submit a reorganization plan for the bankruptcy court’s approval.
Congress recently amended Chapter 11 to create a streamlined procedure for small businesses seeking to reorganize. Under an additional amendment passed in response to the COVID-19 emergency, any Florida business with less than $7.5 million in debts can take advantage of these new procedures, known as Subchapter V. If you would like to learn more about Subchapter V and whether it may be an option for your struggling business, contact Miami Chapter 11 bankruptcy attorney Julia Kefalinos today at 305.676.9545 to schedule a consultation.