When filing business bankruptcy, the business the structure of the business matters.  It does not only determine whether business debt will get discharged (wiped out) in a Chapter 7 bankruptcy (sole proprietors, only) but also whether your personal assets could be used to pay off business debt (sole proprietors and partnerships). Prior to entering a bankruptcy filing, it is important to know who has the authority to file for bankruptcy on behalf of a particular entity type. The bankruptcy case may be dismissed should an unauthorized person initiate the bankruptcy.

Filing Business Bankruptcy: Sole proprietor 

Since a sole proprietor owns the business in its entirety and is responsible for paying the company debt, he or she has complete authorization to file a bankruptcy. It is important to note that the will not be permitted to file the bankruptcy in the name of the business alone. The owner’s personal finances will be involved in the bankruptcy filing.

Filing Business Bankruptcy: Partnership

Although partnership is similar to a sole proprietorship, more than one owner or partner exists. Similar to a sole proprietorship, general partners are also held accountable for company debt in their personal capacity. Only the managing partner may file for bankruptcy. Other than that, all the partners must sign the bankruptcy petition unless it is an involuntary petition.

Filing Business Bankruptcy: Limited liability company

A limited liability company does not have an owner. Instead, an individual can hold an ownership percentage.  The articles of organization contains the ownership interests as well as the name of the managing members (the people who have authority to make decisions on behalf of the LLC). The articles indicate that the managing members of the LLC have the power to initiate a bankruptcy filing.

Filing Business Bankruptcy: Corporation

Similar to an LLC, a corporation is an entity on its own and can’t be owned by an individual. Individuals obtain an ownership interest by purchasing shares of stock. Corporate officers are elected by the board of directors to take specific actions on the corporation’s behalf. The authority to file a corporate bankruptcy is stated in the organizational documents. Shareholder may not initiate a corporate bankruptcy. This can be problematic if the business is failing and an authorized officer disappears.

As noted above, each entity is treated differently in bankruptcy. In order to prevent an unexpected outcome, it is crucial to understand these differences before entering into a bankruptcy. As such, it is recommended to seek out the services of an experienced bankruptcy lawyer.  In some cases, filing bankruptcy may not be the best option for your business. Keep in mind that there other options available to you such as: