Personal bankruptcy in Canada is quite straightforward. If you meet with a trustee and complete all the requirements, your debts are usually discharged within 9 months. If you own a small business, however, bankruptcy could be tricky. Sometimes, your personal bankruptcy can affect your small business finances.
If your business is run as a sole proprietorship, for example, you and your business are considered one entity. That means that your business assets could be sold as part of your bankruptcy proceedings. It also means that business creditors can collect from your personal assets if necessary.
A partnership follows the same general rules as a sole proprietorship, except any member of the partnership can create debt on behalf of the business. If one of the partners starts bankruptcy proceedings, it can affect business assets and cause them to be liquidated. Speaking with a bankruptcy trustee or financial counselor may be your best bet in this case. You may be required to sell your interest in the partnership as part of your personal bankruptcy.
Corporations, on the other hand, have different rules. Because shares in a company are considered personal property, you may have to liquidate your shares in the company to pay creditors. However, the business itself is generally unaffected.
How can I keep my small business from going under if I’m filing for personal bankruptcy?
Perhaps you’re in financial trouble personally, but your business is doing fine. While it may seem logical to incorporate your business just before declaring bankruptcy, this strategy may not work. Reducing your personal liability in a business, especially a profitable business, right before a bankruptcy could be seen as fraud.
You may also wish to avoid bankruptcy entirely. If you can come up with another solution, you may be able to protect your business assets. A debt consolidation loan or consumer proposal might be good alternatives to personal bankruptcy.
What will happen to my small business assets?
If you’re facing bankruptcy and you own a sole proprietorship or are a member in a partnership, your business assets may be liquidated to pay your creditors. How much you’ll have to liquidate and which assets are determined by your bankruptcy trustee. Federal and provincial laws can protect some of your assets. In many cases, you’re allowed to keep business assets up to a certain threshold. The amount you can keep varies by province, but it might be enough to keep your small business going.
Your small business assets may also fall under “protected” categories. In that case, you’ll get to keep them. If you can, converting some of your business assets into protected assets may be a smart move. However, the rules for protected assets are strict, so you may wish to discuss this with a bankruptcy adviser before making any moves.
Protecting your small business from bankruptcy can be a challenge. However, if you’re smart about your personal bankruptcy and how you structure your business, you may be able to keep your business in spite of your personal financial troubles. If you’re under financial stress, start taking steps today to protect your small business.
About the Author
Carly Lance loves to blog about personal finances whenever she can. She also is employed as the blog and marketing manager at Personal Bankruptcy Canada, a company of bankruptcy trustees in Canada specializing in the bankruptcy and insolvency act that help “good people with bad debt.”