When a small business begins to fail, bankruptcy is often seen as the final option. But is bankruptcy the best option for your small business in Canada?
Essential information about small business bankruptcy in Canada
When a small business becomes buried in debt, bankruptcy is the most commonly known solution.
But when it comes to filing for bankruptcy, it can be more complex than a lot of small business owners realize. The structure of your business and the types of creditors you have are two factors to consider.
Even further, bankruptcy can actually be very costly and to the surprise of many small business owners it can potentially create more problems than it solves.
It’s imperative to understand all the other options available and what the personal implications are in either bankrupting or closing the business.
Let’s go through and take a look at some essential information every small business owner should know about bankruptcy in Canada.
Partnerships and Sole Proprietorships
When a business is set up as a sole proprietorship or a partnership then it is not the business that goes bankrupt but the person.
This is because the structure of the business does not legally separate business and personal assets/liabilities.
Any assets used to operate the business and any accounts receivable due to the business are personal assets used to limit the liabilities and any creditors are dealt with under personal bankruptcy.
Incorporated Companies
If you chose to incorporate your business, then legally the business is a separate entity and its assets are owned by the business. In this case the incorporated company can go bankrupt if it cannot meet its financial obligations.
The assets of the business are sold as part of the company’s bankruptcy and used to reduce the liabilities. Certain classes of creditors may have preference over the assets and these creditors are usually paid first.
For an incorporated company to go bankrupt it will usually cost a minimum of $15,000 and for a lot of small businesses it is not feasible to come up with this money and informally closing the company can be just as effective as long as it is done properly.
Here are the first few things to consider before you think about bankruptcy for your small business:
Does the business make money?
If your business is consistently losing money and being subsidized by personal funds or personal credit it may be time to stop the bleeding and walk away.
However, if your business is profitable but just facing hard times due to temporary factors such as a downturn in your market or the economy, it may be a good idea to look at other options to restructure the debt.
Does the business have assets?
If your business has more assets than liabilities, then it may be worth saving or selling. If the liabilities are greater than the assets it may be time to close.
How the assets are handled in this situation is very important as certain creditors may have preferential claims over the assets and this needs to be recognized and carefully dealt with.
Are you personally liable for the debts?
Bankrupting the company only deals with the company’s liability to pay the debts.
If you have personally guaranteed the debts or they are directors liability (such as most CRA debts) you need to consider your options very carefully and consider negotiating with creditors if the business cash flow can maintain new payment terms.
Closing down or bankrupting the business will leave creditors with no other option but to go after you personally for the debts you have guaranteed.
As with any situation you need to obtain professional advice on all the options available to ensure the best results. Performing your due diligence on how the business is closed can be more important than the due diligence you completed prior to starting the business.
