Starting a New Business After Bankruptcy
Business owners who are getting started again after successfully completing a bankruptcy case may want to be aware of certain issues related to financing. For example, you will want to keep your personal financial situation separate from the finances of the business. A business owner often will file an individual bankruptcy based in part on debts from a failing business. To prevent this situation, you may want to carefully consider your choice of business form.
A limited liability company or a corporation can shield you more effectively than a sole proprietorship or a partnership. At the same time, even if you choose a business form that does not permit personal liability, a creditor that lends to your entity may want the business owner to agree to responsibility for the loan. This protects the creditor from losing their investment if the business fails, which is not uncommon.
Financial Planning for a New Business After Bankruptcy
If you are emerging from bankruptcy, you may not have significant personal capital to invest in your business. You also may not have strong credit, which may make it more difficult to persuade banks to finance your business. However, there may be ways to work around this situation. If you are starting a business with someone else, you may want to make sure that they have good credit to offset your own issues. You can also put together a detailed business plan to show banks and investors why your business will be more successful this time. Certain local entities, such as community banks, may offer financing to businesses in their area.
You can also consider seeking assistance from the Small Business Administration (SBA) of the federal government. This may give you the boost that you need but may be tied to a personal guarantee. In some cases, the SBA may require a business owner to secure the loan with their home or another substantial asset.
Certain types of businesses may require less capital investment than others. You may want to consider, at least temporarily, working as an independent contractor in the gig economy or as a subcontractor for another business. Alternatively, a service-oriented business may not require as much capital to launch.
Risks for Business Owners Starting a Similar Business
Many business owners have a skill set that fits a certain industry or product. They may want to do essentially the same thing with their new business that they did with their previous business. However, this is not always a smart plan. You might be exposed to allegations of fraud if you start another business that is virtually identical to your previous business, regardless of the business form that you choose for the new business. Even if fraud does not become an issue, a creditor of the previous business may be able to collect debts related to that business from the new business. You can discuss your situation with an attorney to understand the specific risks and options for addressing them.
Other Tips for Starting a Business After Bankruptcy
Taxes are an important concern for business owners who have a precarious financial situation. You will be personally responsible for the taxes associated with a business, and you should make sure to keep up with business and trust fund tax debt. You will need to get new tax or employer identification numbers, which will be different from those associated with your previous business.
Since your financing may be limited, you should be careful about payment terms for your customers. While you may want to build goodwill by being generous, you need to make sure that your business gets paid.
You should keep records of how your business is performing. This can help you improve your financing options over time, assuming that the business succeeds. Providing lenders and potential investors with this information can help convince them that your business is a safe investment despite the failure of your previous business.
