How does a small business bankruptcy affect me, the business owner?

We hear a lot of questions when small business owners come in to discuss their finances and the future of their businesses. Probably the most important question, and the one we are most sensitive to, is “How does a small business bankruptcy affect me, the business owner?’”

While each small business is unique and the affect a small business bankruptcy may have on the business owner depends on an individual’s situation, one thing that is certain is that a small business bankruptcy does not affect the credit rating of the business owner. This is because a company is a different “entity” then the individual who owns the business.

However, there are situations where a small business bankruptcy does affect the business owner. One of the situations would be when the business owner has personally guaranteed the debts of a company. Most banks, many landlords, franchisors, and some suppliers will require the business owner to personally guarantee the debts of the company. In these circumstances, if the company cannot pay its debts, the business owner becomes personally liable.

Another situation is where certain laws make the director personally liable for specific company debts. For example, under the Income Tax Act the director of a corporation is personally liable for unpaid employee source deductions or HST. In some provinces, such as Ontario, directors are also personally liable for unpaid wages or vacation pay.

It is important to note that just because someone owns a business, it does not mean they are a director of that business. In addition, someone does not need to be an owner of a business to be a director.

Small Business Bankruptcy for a Sole Proprietorships and Partnerships

You also need to understand that if your business is a sole proprietorship or a partnership (i.e. not an incorporated company), filing for small business bankruptcy is essentially filing for personal bankruptcy. This is because there is no legal separation between the business and its owner(s).

This is a fact that you will certainly want to keep in mind. You will need to seriously consider your personal financial situation and use this information to figure out if it makes financial sense for you to file for bankruptcy due to the financial circumstance of a sole proprietorship or partnership. A Licensed Insolvency Trustee can speak with you on this situation and provide you with the information that you need to make this decision.

If you run a small proprietorship or partnership, since your small business bankruptcy is essentially a personal bankruptcy, your credit score will likely be affected by the bankruptcy.

Get reliable answers to your questions

Speaking with a Licensed Insolvency Trustee is an important first step to understanding the options for your small business as well as understanding how you may be personally affected by the business’s financial situation. When you meet with a Trustee, they will review the financial situation of your small business and provide you with information on the options that are available to you. A Trustee will not try to pressure you into choosing one option over another. The final decision is always yours to make. What a Trustee will do is outline all available options (including those that the Trustee cannot assist you with) so that you have all of the details that you need to make an informed decision for your small business.