Academic journal article Entrepreneurial Executive

Entrepreneur Beware

Academic journal article Entrepreneurial Executive

Entrepreneur Beware

Article excerpt

ABSTRACT

The risks associated with entrepreneurship have been well documented. It is widely understood that the majority of newly formed small businesses will eventually fail within the first seven years. What is not well documented, however, is that many of these entrepreneurs seek to reorganize their debt by filing for Chapter 7 bankruptcy. Small Businesses account for eighty-five percent of all Chapter 11 bankruptcy filing. While most Chapter 11 filings are entered into by small business entrepreneurs, most are involuntarily converted to Chapter 7 cases, resulting in the liquidation and termination of the business. In 2005, a revised version of the bankruptcy code was enacted, significantly augmenting the small business reporting provisions, and increasing the grounds in which a Chapter 11 filing can be converted into a Chapter 7 liquidation. In order to survive a Chapter 11 filing, the entrepreneur should observe the four critical success factors.

INTRODUCTION

Entrepreneurship has been a cornerstone of our economy, accounting for over half of all jobs within the United States, and approximately forty-eight percent of the private GDP. With a monthly average of over half a million newly created businesses, small-businesses employ more than half of the American labor force and generate two thirds of the net new jobs in America (Efrat, 2008). Moreover, small-business owners make up 6 percent of the adults population and approximately 1 1 percent of working Americans. (Efrat, 2008 ). In order to start a small business, the entrepreneur must invest not only an initial infusion of capital, but also scarce resources such as human capital and time.

While entrepreneurial activity accounts for two thirds of all newj obs, and approximately half of the private GDP, the survival rate of small businesses are dismal. Approximately one third of new businesses fail within two years of operation (U.S. Business Administration, Office of Advocacy, 2003). Moreover, half of all new businesses fail within five years of operation. When a business fails, there are two types of liability that the entrepreneur must consider (U.S. Business Administration, Office of Advocacy, 2003). The first type of liability is the scope of the entrepreneur's personal liability for the remaining debts of the business. In order to calculate the owner's personal liability for the debts of the business, the entrepreneur must first determine the form of business structure under which the business was organized (Winrow, 2007). If the entrepreneur was formed as a general partnership or as a sole proprietorship, the entrepreneur will be liable for all existing liabilities in excess of the businesses assets. In other words, once the business is liquidated, the entrepreneur must personally satisfy any remaining debts that exceeded the businesses assets (Winrow, 2007). If, however, the business was formed as a business structure containing the limited liability attribute, the entrepreneur will be shielded from personal liability as the limited liability attribute severs liability at the level of the business. While the limited liability attribute usually shields the entrepreneur from personal liability, the entrepreneur will still incur liability if she personally guaranteed a debt, or signed in her personal capacity, at the time the debt was entered into (Geu, 1992). When this occurs, the entrepreneur is personally guaranteeing the payment of said debt. This has become a common scenario, as many lending institutions and investors have become hesitant to invest in new limited liability business structures, due to the low success rate.

The second component of liability occurs when a business encounters financial difficulties, but wants to continue the business in lieu of liquidation. When an entrepreneur encounters financial challenges, and is unable to pay creditors, she may seek bankruptcy protection, which results in an automatic stay. …

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