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Bankruptcy and the small business

Many owners of small businesses in Bradley County do not make a sharp distinction between their business finances and personal finances. These owners treat their businesses as if the business were merely another category of personal finances. Unfortunately, for these businesses and their owners, the lack of a clear distinction may create unexpected hardships, if the business falls on hard times -- and especially, if bankruptcy appears to be the only remedy for the business.

Small businesses in Tennessee are organized in four types: sole proprietorship, general partnership, limited liability company (LLC) and corporation. Sole proprietorships and general partnerships are generally treated as though the business and the individual owner are the same entity. The owner is personally liable for the debts of the business.

The members of an LLC are not personally liable for the debts of the business unless they have personally guaranteed the company's obligations. Shareholders in a corporation are likewise not liable for the company's debts in the absence of personal guarantees. Unfortunately, when a business is facing hard times, lenders generally require personal guarantees, so that they can seek repayment from the individual owners.

If a small business decides to seek bankruptcy protection, it must choose from Chapter 7, Chapter 11 or Chapter 13. Chapter 7 requires the sale of the company's assets and the use of the proceeds to pay a pro rata amount to each of the company's creditors.

Because the owners of partnerships and sole proprietorships are not shielded from personal liability by the business's organizational format, they will be required to file their own bankruptcy petitions to avoid personal liability for the remainder of the company's debts. Members of LLCs and corporate shareholders may be required to file personal bankruptcy petitions to avoid general liability to the company's creditors.

Anyone who runs a small business that is facing financial turbulence may wish to seek the guidance of an experienced bankruptcy attorney. A knowledgeable bankruptcy lawyer can explain the effect of a bankruptcy on the company's own finances and the finances of the owner. Such a lawyer can also assist in choosing the bankruptcy proceeding that makes the most sense for both the owner and the business.

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