Chip Parker and I have been writing about bankruptcy issues for the self employed over on the BankruptcyLawNetwork.
Chip pointed out that the bankruptcy of the shareholder does not protect the operations of a corporation that the debtor owns, since the corporation is not in bankruptcy, the shareholder is.
The flip side of that proposition is that since the incorporated business is not in bankruptcy, it can usually proceed to operate through the bankruptcy of its shareholder. After all, it is a separate entity, distinct from the owner of the stock.
When a small business is a proprietorship, the assets belong to the owner and are part of the owner’s bankruptcy estate when the owner files for debt relief. The trustee may want the business to stop operating 1) so it does not incur more operating debts; 2) so that the trustee is not liable for any tort claims that arise after the commencement of the bankruptcy; and 3) so the assets can be preserved and accounted for.
I have frequently advised clients with an operating business or professional practice that they want to continue to run post bankruptcy to incorporate before filing. In that manner, they draw a circle around the business assets and create a separate legal “person” who is not in bankruptcy. It shields the trustee from the concerns set out above and allows the debtor to continue to work.
If the stock in the corporation has non exempt value on the open market, the debtor may buy the stock from the trustee. Most small businesses however have little value if the owner were to stop working in the business. Trustees frequently abandon such assets as having insignificant value for creditors.