When an owner is considering having their business file for bankruptcy, many factors will influence how and to what extent it can disrupt creditworthiness — both for the owner and the business. In Canada, where businesses operate under specific national and provincial regulations, it is crucial to understand how insolvency affects a company’s financial standing.
Understanding creditworthiness as a business
Creditworthiness refers to a business’s ability to repay its debts and obligations. Lenders, landlords, suppliers and creditors all assess creditworthiness to determine the level of risk involved in extending credit or providing financing to a business.
A key factor in assessing creditworthiness is the business’s credit score, which reflects a company’s history of borrowing and repaying debts.
What is a business credit score?
A business credit score — much like a personal credit score — is a numerical representation of the company’s creditworthiness, and it helps lenders evaluate the risk associated with lending to the business.
Canada has three main credit bureaus: Equifax, Experian and Dun & Bradstreet, which specializes in business credit reports. Each produces multiple scores to give potential creditors insight into your business’s financial health and the likelihood of on-time payments.
Bankruptcy and business structure
One of the key aspects of how bankruptcy can affect a credit score and creditworthiness depends on the structure of the business. However, in several cases, once a business declares bankruptcy with the Office of the Superintendent of Bankruptcy the company will no longer be able to conduct business.
Sole proprietorships and partnerships
Unless you’ve incorporated your business, according to the Canada Revenue Agency, “you and your business are the same legal entity.” So the business belongs to you, or you and any partners. If you choose to file, you would file a personal bankruptcy (instead of a corporate bankruptcy), and your personal credit rating may be affected.
For example, some vendors and landlords may require small business owners to use personal assets as guarantees. Or you may have used personal credit to support your business’s finances. In both cases, a Licensed Insolvency Trustee (LIT) will liquidate the business’s remaining assets to pay off your creditors.
Because sole proprietorships and partnerships are so closely tied to the owners, these bankruptcies would appear on the owner’s personal credit report and have the same effect as a personal bankruptcy on the owners’ credit ratings and credit scores.
Note: Because of the more complex structure of partnerships, bankruptcy may or may not end the business. If a business has more than two partners, the personal bankruptcy of one partner won’t necessarily end the business.
Corporations and bankruptcy
If your business is incorporated and goes bankrupt, it’s not personal bankruptcy. Corporate bankruptcy is intended for any incorporated business, regardless of size. According to the CRA, “In most cases, unless a bankrupt corporation pays all debts owed at the time of bankruptcy, the company ceases to exist.”
It’s worth noting that alternatives to bankruptcy may be available for a small business. A trustee can help you explore these alternatives, potentially saving the business from going bankrupt and impacting a business’s owner’s credit score and creditworthiness.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.