Bankruptcy for the Sole Proprietor
When a small business operating as a sole proprietorship files a petition for bankruptcy, the business owner must come up with a plan to legally satisfy both the creditors and the IRS. Unlike in a corporation, the sole proprietorship is not a separate legal entity from the individual who started the business.
For this reason, a sole proprietor is liable for all debts incurred by the business. In addition to being accountable to creditors, the sole proprietor is also liable to the IRS for any tax due on gross profit, based on income remaining after expenses.
The tax consequences depend on the type of bankruptcy petition filed. A sole proprietor can file for bankruptcy under Chapter 7 or Chapter 13. Each method of filing for bankruptcy comes with pros and cons, especially when it comes to the total amount of taxes that must be paid under each method.
Attorneys for Bankruptcy as a Sole Proprietor in Dallas, TX
The bankruptcy attorneys in at Littlefield Law Firm, located in the Dallas-Fort Worth area, can help you decide the best way to file for bankruptcy based on your circumstances. We can help you learn more about what happens when a business files for bankruptcy under Chapter 7 or Chapter 13.
We represent clients in bankruptcy court throughout the greater Dallas-Fort Worth area including in the Northern District of Texas at the Earle Cabell Federal Building. We also represent clients in the US Bankruptcy Court for the Eastern District of Texas in Plano, TX.
At Littlefield Law Firm, our bankruptcy attorneys represent clients throughout Dallas County, Collin County, Kaufman County, and Rockwall County. Call (972) 812-0900 today.
Sole Proprietorship Information Center
- What is a Sole Proprietorship?
- How Does Chapter 7 Effect Sole Proprietorship?
- How Does Chapter 13 Effect Sole Proprietorship?
A sole proprietorship is one of the most common and simplest forms of business in Texas. In a sole proprietorship, a single individual runs the business activities without a formal organization. When the business is conducted under an assumed name, then an assumed name certificate should be filed with the office of the county clerk in the county where the business premise is maintained (often called the "DBA").
The Chapter 7 bankruptcy (often called the "liquidation") process is intended to discharge the debts of those sole proprietors who are unable to pay them. In exchange for the forfeiture of any non-exempt assets, the law provides a process for the debts to be discharged.
If a sole proprietor has income above the median income in his or her areas, then they may only qualify for Chapter 7 bankruptcy if more than 50% of their debs arise from their business.
The Chapter 13 bankruptcy, the most frequently used method of bankruptcy, operates to reorganize the debt. Chapter 13 is available to a sole proprietorship with less than $394,725 in unsecured debts and less than $1,184,200 in secured debts. The benefit of filing for a Chapter 13 bankruptcy is that it allows the petitioner to keep those assets that would have been liquidated in a Chapter 7 bankruptcy.
The main downside to filing this type of bankruptcy for a sole proprietor is that it provides no tax relief, which might leave the sole proprietor liable for all outstanding business taxes.
This article was last updated on Friday, February 16, 2018.