When we talk about small business bankruptcy, there's not much difference between personal bankruptcy and that of a small business if the business is not a corporation. Generally speaking, bankruptcy is a legal avenue for corporations or individuals to pursue relief from unpayable levels of debt.
Once an application for bankruptcy is filed a "stay of proceedings" goes into effect which prevents unsecured creditors from starting or continuing legal action against the creditor to recover debts. In the case of personal bankruptcy, the stay of proceedings prevents (for example) a creditor from the garnishment of wages of the debtor.
For unsecured creditors, the stay of proceedings levels the playing field so that one creditor does not gain an advantage over others in terms of repayment of debt. Note that bankruptcy proceedings can be initiated by unsecured creditors—a creditor may file a petition to place a debtor into bankruptcy if it is owed more than $1,000 and the debtor has recently committed acts of bankruptcy, such as failing to pay liabilities, committing acts of payment fraud, avoiding creditors, secretly disposing or hiding assets, etc.
Secured creditors are usually not affected by bankruptcy as they have the right to recover collateral posted by the individual or corporation as security for debts, such as a mortgage on the debtor's property or liens on business equipment.
Personal or Non-Incorporated Bankruptcy
If a person's business is a sole proprietorship or a partnership, legally, they are their business, so when they face the prospect of bankruptcy, all their assets are involved and the bankruptcy procedures are the same. In other words, the assets of the business cannot be held separate from their personal assets, so a small business bankruptcy is, in effect, a personal bankruptcy.
Incorporated Business Bankruptcy
Small business bankruptcy is different for incorporated businesses because corporations are independent legal entities. Running an incorporated business gives a small business owner liability protection; it is the business' assets that are forfeit, not the individual's. The exception to this is when (as is required in many cases to secure debt financing) the business owners(s) has pledged personal assets as security for the debt (such as mortgages on personal property, etc.).
Otherwise, the bankruptcy procedures are essentially the same as for personal bankruptcy. The company is forced into or voluntarily seeks bankruptcy protection, and all of the company's assets are turned over to the Trustee in Bankruptcy who sells them and distributes the funds to the creditors.
Note that if your business is incorporated and unable to remit taxes and is forced to file for bankruptcy the Canada Revenue Agency (CRA) has first priority on the company assets over all other secured creditors. Note also that company directors can also be held liable if there are unremitted source deductions (income tax, employment insurance, CPP) or unpaid sales taxes such as GST/HST.
According to the Office of the Superintendent of Bankruptcy Canada, there were 121,609 personal bankruptcies in Canada in 2015, an increase of 3.0% over 2014. Of these, 58,203 were Consumer Proposals. Total assets for all bankruptcies in 2015 at the time of filing was $10,474,489,079 and total liabilities $14,125,879,957.
There were 4,107 insolvencies filed by businesses in 2015, a decrease of 2.7% from 2014. Of these, 1,018 were proposals. Total assets for all business bankruptcies in 2015 at the time of filing was $680,664,124 and total liabilities $5,944,924,099.
Alternatives to Declaring Bankruptcy
A Consumer Proposal involves negotiating a partial payment of your debts in return for your creditors forgiving the remaining amount. A Consumer Proposal has a major advantage for sole proprietors and partners in that unlike declaring bankruptcy, your personal assets are not liable for seizure.
From a creditor standpoint, a Consumer Proposal is preferable to bankruptcy in that it allows them to at least recover a percentage of the outstanding debt, while in a bankruptcy proceeding they may lose all of it.