Many New Yorkers who start their own businesses, alone or with someone else, choose to incorporate. Their personal assets are differentiated from the company’s, offering greater protection, banks are more receptive to lending money to incorporated businesses, and having “Inc.” or “Corp” after the company name enhances credibility and opens up more opportunities.
When an economic downturn plunges the corporation underwater financially and recovery appears to be impossible, filing for Chapter 7 bankruptcy is a solution that will also dissolve the company. The bankruptcy trustee will liquidate all corporate assets and distribute it to creditors according to the level of importance. Those whose claims are backed by collateral are paid first, with shareholders and finally owners at the other end of the spectrum.
Because the corporation’s shares lose all value in a Chapter 7 bankruptcy, shareholders lose their entire investment. They also receive no dividends until all creditors are satisfied, and since the corporation would not be filing for Chapter 7 if it had the financial resources to pay its debts, the chances that shareholders will receive any money at all is slim.
Liability for corporate debt
Company directors, officers, and shareholders are not generally liable for business debts unless they personally guaranteed any of them or indulged in misconduct that led to financial damages. If a bankruptcy court concludes that mismanagement or fraudulent operations contributed to the bankruptcy, then it may “pierce the corporate veil” and hold corporation members responsible for the debts. Examples of actions that can revoke liability protection include:
- Fraud, wrongdoing, or injustice committed against third parties. For example, a company shuts down to avoid a judgment it cannot pay, only to reopen later with the same owners, employees, and assets.
- Failure to maintain a separate identity from the owners or shareholders. This situation occurs when personal and business assets and funds are commingled instead of being kept separate.
Personal vs. corporate
While personal bankruptcies end in a discharge if the debtor fulfills their obligations, corporations do not—they cease to exist after all assets are sold and distributed. For this reason, people who run single-owner corporations frequently opt to file for personal as opposed to corporate bankruptcy. This step will eliminate the business debts that you guaranteed yourself, preventing creditors from coming after you once the company ceases to exist and allowing you to begin anew once you receive your discharge.
If you own an incorporated business and need advice on how to deal with excessive amounts of debt, then a New York bankruptcy attorney can give you the advice you need. In some cases, personal bankruptcy can eliminate the debt more effectively, but an experienced attorney will recommend the best solution for your situation. Jayson Lutzky is a Bronx bankruptcy lawyer with over 34 years of experience as an attorney. He offers free in-office initial consultations. Call 718-329-9500 to set up an appointment or visit MyNewYorkCityLawyer.com to learn more.