MNP Ltd.

MNP Ltd.

October 02, 2012 17:00 ET

Can You Operate a Business During a Bankruptcy?

CALGARY, ALBERTA--(Marketwire - Sept. 27, 2012) - There seems to be a lot of confusion about the difference between filing for personal or a business bankruptcy.

Some of the confusion may stem from the fact that the answer to this question depends on the way your business is structured.

There are three types of business organization: a sole proprietorship, a partnership and a corporation.

If an individual runs a sole proprietorship, there is no difference between him or her and the business. If that person files for bankruptcy or makes a consumer proposal, then the business is included. The assets vest in the Trustee (subject to Provincial exemptions) and the debts of the business will be discharged at the end of the process. In most provinces, your tools of trade (any assets you use in the business) are protected and cannot be touched in a bankruptcy or a consumer proposal.

The same is essentially true for a partnership, although it is theoretically possible for a partner to file for bankruptcy or a consumer proposal without the partnership becoming bankrupt. In most cases, however, if the partnership is bankrupt, both partners will have to file for bankruptcy as well, since they are jointly and severally responsible for the debts of the partnership. (As a side note, some partners seem to think they are only responsible for their proportionate share of the partnership debt, this is incorrect).

In a corporate situation, it is possible for the corporation to file for bankruptcy without the shareholders having to file, or vice versa. This is because a corporation is made up of multiple, separate "legal entities." Shareholders and directors are generally not liable for the debts of the corporation, except in specific cases set out by law, or if they have made themselves liable by signing personal guarantees.

If a shareholder files for bankruptcy, the trustee will usually become the owner of the shares and will attempt to sell them if they have any value.

If you are unsure of your situation and don't know what your next step should be, contact MNP's insolvency team for a free, initial assessment of your particular situation so we can help you get back on solid financial ground.

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