Unincorporated Small Business vs. Corporate Bankruptcy: How Do They Differ?

Unincorporated Small Business vs. Corporate Bankruptcy: How Do They Differ?

It is always important to make an informed decision when it comes to bankruptcy, as this option should be the last consideration if you or your business is struggling financially. Depending on the size of your business, the processes may differ. When making a decision about your financial situation, you will want to speak to a Licensed Insolvency Trustee (LIT) in the Ottawa Area to learn about your options.

Two Types of Bankruptcy for Ottawa Businesses


The two primary types of business bankruptcies are personal unincorporated businesses and incorporated companies. In a sole proprietorship, which is the most cost efficient for an individual to open, but also has many drawbacks in terms of personal liability, or a partnership which in Ontario is governed by the Ontario Partnerships Act 1990 where the business is typically run by two or more people, bankruptcy would function similar to a personal bankruptcy. If this applies, you and your business partners are considered one and the same with your company so the assets of your business cannot be separated from personal assets. Many personal bankruptcies actually result from people who open their own businesses and do not succeed. Unfortunately, the effects of filing can linger in different aspects of your life – including your employment, credit rating and applications, and possibly even your relationships. This is why it’s important to deal with financial situations as soon as they arise.

For larger business organizations, corporate bankruptcy is generally the process you would follow. If a company must consider insolvency options, the assets of a corporation are considered separate from your personal assets and the bankruptcy will only affect the former. Additionally, while many owners of incorporated businesses believe they have liability protection in a corporate bankruptcy, this may not hold true. An owner may be liable for debts which were personally guaranteed such as bank loans, lines of credit, and credit cards, as well as statutory obligations for unpaid employees, payroll deductions, HST etc.
One of the differences between a personal and business bankruptcy in Kingston or Ottawa is that a company or an unincorporated business may be forced into the bankruptcy by creditor(s) obtaining a court order. For individuals, the decision is usually voluntarily.

Bankruptcy Considerations for Small Business Owners and Self-Employed Persons


Some of your unsecured assets may be lost when filing for bankruptcy, with exceptions. For example, $11,300 for the sale value of “tools of the trade” is exempt.
As a sole proprietor, if your income exceeds the minimum standard which is considered exempt income for determining surplus payments, you will need to pay a portion of your earnings as surplus income during the term of your bankruptcy. The length of time will be determined based on whether you are a first or second time bankrupt. It is easier to estimate the surplus income you need to pay if you make a salary, while for self-employed individuals, surplus income will be determined after deducting business costs from revenue.
You may experience an added difficulty as a small business owner while trying to obtain access to credit if you declare bankruptcy because your existing access to credit will be gone. While you may need to rely on an overdraft or credit in order it run your business, accessing credit may be implausible since you must disclose your financial situation in order to apply for new credit.
If you decide to declare bankruptcy, then your taxes will be included with your other debts, which can be a huge relief for small business owners who typically have income taxes and sometimes HST as their largest source of debt. However, if Canada Revenue Agency registers a lien against your property, the lien will stay despite filing bankruptcy until either the property is sold or you make satisfactory arrangements to settle. It is important to seek professional help in the early stages of any financial stress to possibly eliminate having a tax lien registered.
Your Licensed Insolvency Trustee (LIT) in Ottawa will file two tax returns on your behalf in the year that you declare bankruptcy. The first is a pre-bankruptcy tax return covering the period from January 1 up to the day before your bankruptcy, and the second will be a post-bankruptcy return for the period from the date of filing for bankruptcy to December 31st of the year you file. Your trustee will also may file any prior tax returns that were not previously filed and you will be able to keep any refunds available from these tax returns.
For more information about this process and to learn about bankruptcy in Kingston, Ottawa, and across Eastern Ontario, contact D. & A. MacLeod today.


Choosing an Alternative to Bankruptcy


In an effort to give yourself time to organize your debts, you can make a proposal to your creditors through a Trustee who will file it with the Office of the Superintendent of Bankruptcy Canada and notify your creditors. Doing so provides legal protection while you are making a plan to improve your situation as a small business owner. This action can potentially help you avoid the requirement to file for bankruptcy if the compromise offered to your creditors is accepted.
Depending on your financial situation, you may also be eligible to file a corporate proposal. Filing a Division I proposal stops legal action against your company by its creditors. The Bankruptcy and Insolvency Act governs this process, which lets you propose paying off a set portion of the money owed instead of being forced to close the company and file for bankruptcy. In order to obtain the approval of creditors, the amount offered in the proposal should be more than creditors would receive if you went bankrupt, but still low enough to help you improve your finances and become solvent. In advance of a proposal, you can also file a Notice of Intention to File a Proposal, which will stop your creditors from prematurely interfering with the life of your company for a limited period of time to allow a proposal to be prepared for consideration with your creditors.


Contact us to Learn about Bankruptcy Options in Kingston, Ottawa & Eastern Ontario


Our licensed professionals can help you to find debt relief while trying save your small business or your corporation. With over 65 years of experience, our team has been assisting businesses and individuals alike with corporate and personal bankruptcy in Ottawa. We have 8 offices across Eastern Ontario, including Kingston, Ottawa, Pembroke, Smiths Falls, Orleans, Kanata, Cornwall, and Brockville.
We offer free, no-obligation consultations. Call us at 613-236-9111 today to begin on the road to a new beginning.


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