The most common worries for a small business owner, when facing company closure, are the most appropriate and best action steps going forward.
“According to figures from the office of national statistics, on average, one in three new businesses fail in their first three years. One in three start-up businesses fails within the first three years (Source: Intuit Report).”
For a small business owner, failure can be heartbreaking. On a personal level, it can mean that all of the money invested, and all the hours dedicated to a venture had been for naught. Then there is the financial angle: entrepreneurs may be liable for business debts, which could impact your quality of life.
What should you do when your business is on the line, and you’re ready to close your doors?
Liability for Business Debts
A business that fails may owe significant debts. Depending on the structure of the business (i.e., legal entity) you may be liable for some or all of them.
For instance, if you own a sole proprietorship, you have sole responsibility for all of the company debts. As Nolo.com explains, “Legally, a sole proprietorship is inseparable from its owner — the business and the owner are one and the same. As a result, the owner of a sole proprietorship is personally liable for the entire amount of any business-related obligations, such as debts or court judgments. This means that if you form a sole proprietorship, creditors of the business can come after your personal assets — your house or your car, for example — to collect what the business owes them.”
If you own a partnership, again the business is not recognized as a separate legal entity, and you and your partners are responsible for all of business debts. Each partner is considered jointly and severally liable.
“The partnership debt belongs to each partner personally — with this added twist: Each partner is personally liable for 100% of the business’s debts. This means that if there aren’t enough business assets to pay the partnership’s debts, and your partners are broke, creditors can take your partner’s personal assets to pay all of the business’s debts, not just your pro rata share of the debts,” according to Nolo.com.
In contrast, if you operate as a limited liability partnership (LLP), then personal liability will be the amount you invested in the partnership, plus the amount of any personal guarantees, e.g. on bank loans.
Meanwhile, if you own a “corporation or LLC, you and your business are separate legal entities. As such, in theory you could have no personal liability for the debts of your business, meaning that creditors can’t take your house or other personal assets to pay your business’s debts, even if your business can’t pay them (Source: Nolo.com).
Entrepreneurs Faced with Bankruptcy
The failure of a business often leads to a situation where the small business owner faces personal insolvency. Insolvency is where either liabilities exceed assets, or financial obligations cannot be met within a reasonable time period.
However, declaring bankruptcy is more than just being insolvent. To be declared bankrupt, an individual must have no prospect of meeting their liabilities in the future.
As AllLaw.com explains, “the way in which your business is organized is going to make a significant difference in how bankruptcy works. If your business is organized as a sole proprietorship or as a partnership, then your business is going to be considered as one and the same legal entity with you (or with you and your partners). This means that a “business” bankruptcy could end up impacting your personal assets and your personal credit standing.”
Before considering Chapter 7, Chapter 13, and Chapter 11 bankruptcy for business debts, entrepreneurs should find out if they are personally liable for business debts, how filing bankruptcy for a business will impact their personal financial pitcure, and which alternatives can assist with business debt.
Obtaining New Work and Financial Means
The first instinct of many entrepreneurs who lose their business is to start another. They may have a natural entrepreneurial instinct, or they may simply not want to be seen as a failure and are desperate to succeed.
When you start a new business, a great deal of planning is required. As mentioned above, a business closure may have impacted you personally: taking a financial, emotional and professional toll.
If this is the case, a short-term option is to seek employment and return to a corporate lifestyle. Reach out to your network, and business contacts to see what they can offer. Entrepreneurs that choose this path are essentially “re-entering the job market after an extended absence. This does not mean that you can’t compete. This means that you might need to be more diligent in your search and have a solid plan in place (Source: Babson.edu).”
Most importantly, if you choose to reenter the job market after self-employment you need to be prepared for interview questions about your decision to work for someone else and why your business closed. Be honest. Share what you have learned from the experience, and explain how you will use your entrepreneurial experience to make you a better manager in the future.
Otherwise, if corporate America is not for you… consider taking the lessons you’ve learned and give entrepreneurship another shot.
This article has been edited and condensed.
Keith Tully has been in business recovery and finance since 1992. In that time he has worked for one of the big for accountancy practices ‘PWC’ in the UK and more recently managed his own business rescue company, Real Business Rescue, which looks to offer support and advice to company directors. Connect with Real Business Rescue on Twitter.
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