If an incorporated business fails, creditors can only go after assets that belong to the debtor company. That means that when an incorporated business winds down or becomes insolvent, most liabilities will not be the responsibility of the corporation’s owners. This is a great relief for many entrepreneurs concerned about protecting their assets if their businesses fail.

However, there are some exceptions to this rule. For example, an owner personally guarantees a debt or commits fraud in connection with their business. They could be held liable for those debts even though their corporation incurred them.

Here are a few things a person in a business can do when their business fails.

Decide Business Entity

The first thing you need to do is decide what kind of entity your business should be, a sole proprietorship or an LLC. This decision will have huge implications on how much personal liability protection your business has and tax consequences, so make sure you understand the difference before making any decisions about which one to choose.

File Bankruptcy

You need to file bankruptcy with the court system. This will protect your assets from being taken by creditors while allowing for an orderly liquidation of all remaining business assets. You should also seek legal advice on how best to handle the situation with your employees and customers.

Review Claims

When an LLC or corporation files for bankruptcy, all creditors must file claims within 90 days from the date of filing for bankruptcy protection (or 120 days if foreign). The trustee then has 60 days after receiving those claims to review them and make distributions based upon priority and other factors set forth.

Contact Creditors

You should contact all of your creditors as soon as possible and let them know that there has been a problem with the company’s finances. This can help prevent some problems later on when they try to collect from you. It is also very important that you continue making payments on any outstanding debts until everything has been resolved so that no one files a claim against your assets.

To learn more about business and handling bankruptcy, visit our blog section.

Author Profile

Linda Bradley
Linda Bradley
Formerly a senior accountant with a business degree, Linda now manages to generate story ideas; planning, assigning, and editing content for our website.


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