A sole proprietorship is a business owned by one person or a married couple that has not been formally set up as a corporation or Limited Liability Company (LLC). If you created a business but did not file the necessary papers to form a corporation or LLC, the business is a sole proprietorship by default. Legally, there is no separation between a sole proprietorship and you. A creditor can sue personally for the business’s debts and take your personal assets, such as your car, home, or money in your personal checking or savings accounts to satisfy a judgment. You need to file bankruptcy personally.
Because of repeated COVID closures or otherwise, if your sole proprietorship is struggling with mounting debt, you can file bankruptcy in one of two ways, Chapter 7 or Chapter 11. Once bankruptcy proceedings are started, creditors cannot attempt to collect debt from you or the business until the bankruptcy process has ended.
Chapter 7 bankruptcy can eliminate most or all of your and your business’s debts. Yet, after a chapter 7 bankruptcy, the business is unlikely to continue. You will be allowed to keep some “tools of the trade.”
Chapter 11 bankruptcy is used by people who want to continue operating a business and repay creditors throughout the court approved payment plan. Property is not sold, but the debts must be eventually repaid.
More on other types of business bankruptcy in later articles.
