USAToday just ran an interesting article on small business bankruptcies. This article makes several interesting points about the rising numbers of small business failures and the impact that will have on the economy. What I think the article misses is that you cannot track the failure of really small busineses through the bankruptcy courts — because they don’t go there.
In most cases the owners of the business file. The Corporation or LLC that is actually the business does not file. Why? Simple, unless you are going to attempt a reorganization in a Chapter 11 (which most really small businesses can’t afford), then there is no reason for a Corporation or LLC to file a Bankruptcy. They aren’t eligible for a discharge in a Chapter 7 filing.
Usually, the better course is to just let the business entity die on the vine. The owner files and goes on down the road. The business entity is just essentially abandoned. The bankruptcy statistics will never be able to track those business failings. So when you read articles on the bankruptcy rate amongst small businesses, assume that the actual failure rate is far higher.
And don’t forget that standard operating procedure with small business debt is that the creditor makes the owner sign a personal guarantee. There’s no point to putting the business into bankruptcy just to have the creditors pursue the owner on his guarantees.