A sole proprietorship is a business owned by one person or a married couple that has not been formally set up as a corporation or Limited Liability Company (LLC). If you created a business but did not file the necessary papers to form a corporation or LLC, the business is a sole proprietorship by default. Legally, there is no separation between a sole proprietorship and you. A creditor can sue personally for the business’s debts and take your personal assets, such as your car, home, or money in your personal checking or savings accounts to satisfy a judgment. You need to file bankruptcy personally.
Because of repeated COVID closures or otherwise, if your sole proprietorship is struggling with mounting debt, you can file bankruptcy under Chapter 7 or, if you have regular income and want to keep the business running, Chapter 13. Once bankruptcy proceedings are started, creditors cannot attempt to collect debt from you or the business until the bankruptcy process has ended.
Chapter 7 bankruptcy can eliminate most or all of your and your business’s debts. Yet, after a chapter 7 bankruptcy, the business is unlikely to continue. You will be allowed to keep some “tools of the trade.”
Chapter 13 bankruptcy lets a sole proprietor with regular income keep operating the business and repay creditors through a court-approved payment plan, usually over three to five years. Property is not sold, but the debts covered by the plan must be repaid.
More on other types of business bankruptcy in later articles.