Small Business Owners: Bankruptcy Issues to Consider
In 2018, 0.7 businesses in every 1,000 in Canada went into bankruptcy, and a further 0.2 in every 1,000 businesses filed a proposal.
With around 1.8 million businesses in Canada, that’s about 1,600 insolvent businesses per year.
Small business owners often find themselves struggling under the weight of their debts, and bankruptcy can be the preferred option for addressing the problem.
Filing bankruptcy for your small business can be complicated, as the process is not the same for every business.
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The structure of your business affects your bankruptcy.
You might also be a small business owner who wants to file personal bankruptcy and wants to know how this will affect your business.
Let’s take a look at some of the key issues to consider and questions that you might have if you are considering bankruptcy for yourself or your small business.
How Does the Type of Business Affect Bankruptcy?
The structure of a small business makes a difference to the bankruptcy, which means that it is important to know and understand how your business is structured.
If your business is a sole proprietorship or partnership, you will need to file personal bankruptcy.
This is because these business structures do not legally separate the business from the individual.
Your personal and business assets and liabilities are not separated and are all your personal responsibility.
Incorporated businesses are separate from the individual.
If you have an incorporated business, you don’t have to file personal bankruptcy.
Instead, your business can be bankrupt while your personal finances remain unaffected.
Assets sold by your incorporated business may need to be sold to pay your creditors.
The type of business also affects how you can run your business after bankruptcy.
If you have an incorporated business and declare personal bankruptcy, you can continue to run your business but must do so as a sole proprietor or resign as a director, as a person who is bankrupt cannot be the director of a corporation.
What Happens to Your Business Debts, Assets, and Equipment?
When you file for personal bankruptcy, there is an exemption allowing you to keep tools and property that you earn to make a living, up to a certain value.
If the value of your equipment exceeds the limit, you will need to make payments to keep it.
If it is your business that is bankrupt, and not you personally, your business assets will be sold to pay your creditors.
Some creditors will receive priority over others so that they get paid first.
If you have business debt that you have personally guaranteed, you can include them in your business bankruptcy.
However, creditors will then be able to come after you personally, so you might also need to file personal bankruptcy.
Access to Credit After Filing Small Business Bankruptcy
Getting new credit can be a concern in bankruptcy, but it’s often necessary for small business owners.
If you file personal bankruptcy, you will have to inform lenders that you are in bankruptcy, making it more difficult to obtain credit.
You can start to rebuild your credit, but it can take a while, and the bankruptcy will remain on your credit report for at least six years.
Bankruptcy and CRA Debts
Some of the debts that you have as a small business owner might include income tax and HST.
When you file bankruptcy or choose the option of a consumer proposal, it can help you to deal with debts owed to the Canada Revenue Agency.
However, if a tax lien has been registered against your property before bankruptcy, it is a secured debt that you will still owe as it won’t be discharged when you file bankruptcy.
Alternatives to Bankruptcy
Before filing bankruptcy, it is also worth exploring alternative options.
There are various ways to avoid bankruptcy, whether you are self-employed or have an incorporated business.
A consumer proposal is one option, which allows you to keep your assets and create a repayment plan for your debts.
When you speak to a Licensed Insolvency Trustee, they can help you to explore the debt solutions that are available to you to protect your personal finances and your small business.
If you are a small business owner considering bankruptcy, we can help.
Bankruptcy Canada provides the information and support that you need to navigate bankruptcy or find ways to avoid it.
Contact us today to find out more about your options for dealing with debt.
