Most people will think that you cannot continue to run a business while in bankruptcy, which in reality, is simply not true. Yes, the bankruptcy may make matters a little bit more complicated at first, however, once you pass those initial stumbling blocks, everything should run the same as before.
It is important to first distinguish between a personal and business bankruptcy. In 99% of cases, when a business goes bankrupt, it stops running either right away or soon thereafter. When a person files a bankruptcy their life continues and they are able to move forward.
In a personal bankruptcy, individuals are still entitled to earn a living. If that person makes their living running a business, it would be unfair to take that possibility away. One of the main goals of the bankruptcy system in Canada is to give an honest, but unfortunate debtor a fresh start, which would be impossible if people were not allowed to work and generate income.
Before deciding to continue operating a business after filing a personal bankruptcy it is important to evaluate if the business is worthwhile. The purpose of filing bankruptcy is to eliminate debt and get your finances back on track; if the business continues to lose money, filing bankruptcy may be to no avail.
In the case of an unincorporated business, there really is no separation between the business and the person running it. Therefore, when meeting with a trustee the business assets and value will be taken into account. This means that any assets will be dealt with as personal assets belonging to the individual filing bankruptcy (not the business) and the revenue generated – net of deductions and taxes – will be counted as that individual’s personal revenue.
Once the bankruptcy is filed all accounts must begin fresh. Credit will likely not be available from suppliers because you may be seen as a lending risk until your finances are in order. Once your debts have been cleared in the bankruptcy and you’ve built up your credit score through by using tools such as a secured credit card, making regular payments and avoiding high interest borrowing options, your business opportunities open up and you can begin to reestablish relationships with lenders and suppliers.
In the case of an incorporated business, the shares or ownership of the separate legal person will be taken into account as an asset of the person filing a bankruptcy. In some cases, people who have filed a bankruptcy cannot be a director of an incorporated company; however, these must be reviewed on a case by case basis. The income that is withdrawn from the company, as salary or “profits” will be counted after personal income taxes, as the personal income of the individual filing a bankruptcy. It is important to remember that if the incorporated business has its own intrinsic dollar value, this will be counted as an asset and may have a value to the bankruptcy.
The incorporation should be unaffected by the filing of a personal bankruptcy by its owner, as it is a separate legal person and has not filed a bankruptcy. Certain partnerships or registered businesses can be automatically deemed bankrupt, should one or more individuals associated file a bankruptcy.
This area of bankruptcy law can be confusing. If your small business is struggling, and you are not sure whether you or your business needs to file for bankruptcy, contact a licensed Canadian bankruptcy trustee in your area. We will look at your unique situation and help you develop a plan, even one that may see you continuing to operate your business if that is what you want to do.