Corporations are legal entities that shield shareholders from the liability, losses and debts of the business. Corporations are separate legal entities that are independent from their owners; therefore, the business management of the corporation is not directly affected by a personal bankruptcy of one of its shareholders. After the bankruptcy filing, the shares of the insolvent shareholder can be administered or sold by the bankruptcy trustee to repay creditors.
Limited Liability Company
Limited liability company owners -- like corporate shareholders-- benefit from limited personal liability for the debts and losses of the business. Under many state laws governing LLCs, the members of the LLC may demand that the person filing bankruptcy sell his interest back to the company. By purchasing the interest of the insolvent member, the LLC avoids involvement in the bankruptcy proceeding and possible disturbances to management decisions of the LLC.
A partnership is an independent and separate business entity owned by two or more people. Insolvent partners-- like members of an LLC -- may be required to sell their partnership interests back to the partnership after filing for personal bankruptcy. The partnership avoids becoming part of the bankruptcy proceedings and can continue to make management decisions.
A sole proprietorship is not a separate or independent legal entity; instead, all business assets are treated as if they are your personal assets. Therefore, in most states, the sole proprietor's business assets are also included in the bankruptcy filing. The bankruptcy trustee may administer and sell those assets, in accordance with state and federal bankruptcy law.