Small Business Bankruptcy in California

California Bankruptcy Laws for Small Businesses

Bankruptcy cases abound not only in individual circles but also in organizations. The organizations mostly at risk of running into bankruptcy in the US are small and medium-sized startup businesses trying to break even in the market. It is estimated that between the years 2005 and 2019, only one-fifth of startup companies managed to stay afloat past the first year of operation. The number further dwindled as the years progressed, with many running into financial challenges that eventually put them out of service. 

 Startup companies in California can file for bankruptcy through three main approaches depending on the structure they are designed. The main business structures common in the state are sole proprietorships, corporations, and partnerships.

While sole proprietorships include legal extensions to the owner, such a business would not be protected under Chapter 7 bankruptcy. Instead, the business owners will be urged to file for Chapter 13 bankruptcy to protect their property and reorganize their debts.

Owners of Corporations and proprietorships are able to file for either Chapter 7 or Chapter 13 bankruptcy under California laws. This arrangement allows you to secure your property while at the same time formulating a repayment plan. The difference between the two options, however, is that with Chapter 13, the company is allowed to stay in business while repaying its debts, while Chapter 7 bankruptcy will not.

Under Chapter 7 bankruptcy, the company will undergo liquidation to cover debts to creditors. This type of approach is most suitable when the company has limited assets, and when the financial situation is too overwhelming for debt restructuring.

Business reorganization under Chapter 11 bankruptcy is only available for partnerships and corporations. However, California laws recognize sole proprietorships for this plan only if their income levels are too high to qualify for Chapter 13 bankruptcy plan. Nevertheless, the plan allows the business to reorganize its debts under the watch of a court-appointed trustee.

Be it liquidation, business reorganization, or debt restructuring under Chapter 13 bankruptcy; business owners have to be careful and consult widely with their attorneys when considering bankruptcy as an option to deal with their debts. A failure to do so could easily lead the business to lose its assets in case of unseen financial shortcomings.

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