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Why do small business set up as sole proprietorship or partnership when filing for bankrupty ?...

Why do small business set up as sole proprietorship or partnership when filing for bankrupty ? How does it help them?

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Expert Solution

Sole proprietorship is a king of business in which business and the proprietor are one-in-the same person. Proprietor is responsible for all the business debts. Due to this, when a small business file for bankruptcy, it set up as a sole proprietorship and both personal and business assets are filed and they become part od the bankruptcy. Sole proprietorship can file for bankruptcy under 2 chapters: Chapter-7 and 13 or 11.

Chapter 7 provides the benefit of wiping out all dischargeable debts and making no need to pay ongoing payments. Secondly, the trustee can sell any asset of the business over and above the market price and this amount can be used in order to pay off debts. Both personal and business assets can be protected by using the exemptions provided under this chapter.

Chapter 13 or 11 allows the business to continue its operations by paying off enough money to its creditors, or make monthly payment to them.

However, partnership is a separate legal entity different from its partners and hence, it can't protect its assets under chapter 7. Both business and personal assets have to be used in order to pay off debts. Though, partners may file for bankruptcy individually under chapter 7 and may discharge their business and personal obligations.

ekkarill92 answered 2 years ago
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