Does my business need to file bankruptcy?

Small business people, that is, people who run their own business (whether a Sub-S corporation, regular corporation, limited liability company - LLC, or sole proprietorship - dba) often ask what kind of bankruptcy should they file. Also, should their corporation or LLC file bankruptcy?

In order to obtain credit in a small business the owners of the business usually have to sign for the debt personally or sign a personal guaranty for the debt. As a result, when the business fails, business creditors will commence collection action against the owners of the business, as well as against the business. Personal bankruptcy is necessary to protect personal income and assets.

If the business is a sole proprietorship, business assets are owned personally and debts are owed personally. If the business is a separate entity, such as a corporation or limited liability company, then business assets and debts are not personal. When the business fails, the entity should dissolve, that is, the assets should be sold and used to pay business debts. For small businesses, bankruptcy is rarely necessary and may be an unnecessary expense.