Can I Keep My Business if I Declare Personal Bankruptcy?

I am often asked by professionals and self-employed individuals about the status of their business if they were to file for personal bankruptcy and whether they could keep their business alive. The answer is: In most cases they can file for personal bankruptcy and keep their business active. However, filing for bankruptcy in some situation can be more complex than a lot of small business owners realize. The structure of the business and the types of creditors are two factors to consider. 

In addition to personal credit card, bank loan and overdraft debts, most professionals and self-employed individuals are often indebted to employees, landlords and the taxation authorities for arrears in personal income tax and HST/GST.

It’s vital to understand all the available options and what the personal implications can be in either bankrupting or closing the business. It’s also important to consider the business structure and the implications of that structure.

If the plan is to close the business, there are a few legal and financial issues and obligations highlighted below that need to be addressed and vary depending on the type of business structure - sole proprietorship, partnership and corporation. Each structure has different and important implications for liability, taxation and succession.

These include:

• Cancel your business registration for your sole proprietorship or partnership and notify Canada Revenue Agency (CRA)
• File a last tax return, if you have dissolved a corporation
• Close your RST/PST/QST accounts with the appropriate provincial agency of your domicile
• Close your payroll accounts with the Canada Revenue Agency (CRA)
• Close your GST/HST accounts with CRA
• Disclose your business to the Trustee. The particulars of your small business need to be disclosed to the Trustee since the business you own and operate is an “asset” you possess. These assets may not have any value to anyone but you; nevertheless the assets have to be declared along with any tangible or intangibles, receivables, and inventory in the business.

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. In these structures, there is no legal separation between the business and personal assets/liabilities. The assets of the business cannot be held separate from their personal assets, so a small business bankruptcy is in effect a personal bankruptcy. 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. So, in essence such a bankruptcy is in effect a personal bankruptcy.

Small business can claim an exemption for 'tools of the trade' in Ontario for a realizable (sale) value of up to $11,300. If your equipment exceeds that value (on a liquidation basis, not cost), you will be required to pay the excess to keep the equipment.

Income taxes and sometimes HST/GST are often the largest debt for small business owners or self-employed individuals. It’s a common misconception that tax debts can’t be included in bankruptcy. The exception would be if the CRA had registered a lien against your property prior to the bankruptcy being filed, since the lien makes the debt secured and bankruptcy only discharges unsecured debts.

Incorporated Companies:
If the business is incorporated, 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. However, upon filing of personal; bankruptcy, you cannot continue to act as Director of the company.

Keep in mind that debts that self-employed and professionals may end up owing to CRA may be substantial in amount, or represent a significant percentage of the insolvent person’s debt load. The reasons for this are numerous from the substantial statutory collection powers available to CRA, to the hands on approach they take in participating in the debt resolution process and their insistence that the debtor deal with their claim in an equitable manner in accordance with CRA’s established policy. To understand your obligation and your options it’s important to enlist the services of an experienced Trustee in Bankruptcy.