By Albert B. Crenshaw

As if running a small business weren't risky enough already, the bankruptcy bill now grinding its way through Congress threatens to make it a lot riskier -- and the consequences of failure more severe.

The provisions are sufficiently harsh to alarm experts who track entrepreneurial activity in this country. Not only would the bill make it harder to save troubled small businesses from liquidation where the owners have taken on personal debt for their enterprise, the bill could also subject them to years of court supervision, making it more difficult, even impossible, to try again.

Small business and entrepreneurship are widely regarded as major engines of the U.S. economy, and according to a study by the National Commissioner of Entrepreneurship, how a country treats failure is a key factor in developing an entrepreneurial culture. When the penalties are too severe, the risks of starting a small business likely become too great for many people and such endeavor falls off.

One provision that some experts find especially worrisome is the proposed imposition of limits on the time that a small business could operate in Chapter 11 of the bankruptcy code.

Such deadlines, which would apply to businesses with less than $ 3 million in debt, would change the whole dynamic of Chapter 11 for small firms, said Elizabeth Warren, a Harvard law professor who served as expert adviser to a commission that studied the current code and recommended changes.

"The key to Chapter 11 [under current law] is that it is an invitation to negotiate, where rights of the parties are established by statute," she said. "It's designed to keep everyone together in the same leaky boat so they'll work out a collective solution."

The guiding principle is that society is better off if these businesses survive. Some are beyond hope, of course, but others recover and go on to thrive.

"Sure, we could liquidate these businesses, but we think we would lose a lot of value," Warren said.

She and the National Commissioner of Entrepreneurship both noted that other countries, such as Japan, Germany and France, have or did have much more stringent laws and less entrepreneurial economies. And there is recognition in some of those countries that treating failed entrepreneurs more leniently would be beneficial, they said.

Imposing a deadline would give creditors a whip hand in negotiations, Warren said.

"The discretion to negotiate is simply is taken away. Either you negotiate a plan by certain date . . . or you're liquidated," she said. Secured creditors, particularly, would have little incentive to bargain. If the debtor business resists, the creditor need only wait until "we hit the magic day" and the business is liquidated and the secured creditors take the assets, she said.

Big businesses, by contrast, would be able to remain in Chapter 11 as long as the bankruptcy court believes they are making reasonable progress.

"The history [of bankruptcy law] has been to do one of two things: Either small and big businesses are treated alike or small business gets better access to reorganization than big business," Warren said. This goes the other way.

The bill's new restrictions on personal bankruptcy may also have an impact on small businesses. Often, struggling entrepreneurs are forced to rely on their personal credit cards to finance their enterprises, and provisions that would force them into Chapter 13 payment plans instead of Chapter 7, where most debts are wiped out, may make it more difficult for these folks to get back on their feet and try again after a failure.

On the Senate Committee on Small Business, both Chairman Christopher S. Bond (R-Mo.) and ranking minority member John F. Kerry (D-Mass.) have expressed concern about the bill. Kerry offered an amendment on the Senate floor to drop the small-business subtitle from the bill, but that was rejected, obtaining no Republican support. Bond succeeded in obtaining passage of several softening amendments, but is said to be less than completely happy with the bill.

Most major business groups, including the National Federation of Independent Business and National Small Business United, support the bill and opposed the Kerry amendment.

"Our members are both small-business debtors and small-business creditors," said NFIB Senate lobbyist Susan Eckerly. "While the language could have been tuned up . . . we felt it was pretty good attempt to balance the needs between those two. We didn't support throwing out all" the small-business provisions.

"Many mom-and-pop businesses extend credit to individuals. If those people declare bankruptcy, [under current law] they can walk away from that debt," said Kristie Darien, government affairs manager at Small Business United. "Small businesses depend on that money."

Service on the new IRS Oversight Board has turned out to be an eye-opening experience for at least one small-business owner.

Charles L. Kolbe, chairman of Red Oak Farms, an Iowa beef producer and marketer, remarked last week at the first public meeting of the IRS panel that when he came on board, he assumed that he was a little guy paying his taxes while his big competitors, with their accountants and lawyers, were escaping the tax burden.

But tax fairness is "a much more complicated problem than I had anticipated," he said.

Certainly loopholes for corporations are a concern as are difficulties many taxpayers have in dealing with the IRS.

However, "a much larger problem" turns out to be "large numbers of small businesses and self-employed people who are paying no tax," Kolbe said. And, in a cry not often heard from small-business representatives, he called for better tax enforcement, including more technical support and agents in the field "to find out who these people are and try to get them to carry their fair share."

So just how lucrative is small business?

Pretty lucrative, according to President Bush and the Treasury Department. On March 16, the president said Treasury data show that 17.4 million small-business owners and entrepreneurs would benefit from his proposal to cut the top marginal income tax rate from 39.6 percent to 33 percent.

The Treasury was a bit more cautious, issuing a state-by-state breakdown of the numbers of taxpayers with income from sole proprietorships and saying that "many" of them currently pay at the 39.6 percent rate.

The 39.6 percent bracket kicks in for most taxpayers at a taxable income of $ 297,350, and critics of the president's tax plan -- including the Center for Budget and Policy Priorities and Robert McIntyre of Citizens for Tax Justice -- were quick to point out that only about 700,000 taxpayers of any sort pay at that rate.

Of the 700,000, McIntyre estimated that only about one-fifth, at most, reported small-business income. "In other words, only about 140,000 small-business individual returns are in the top tax bracket," he said.

"Three-fifths of returns with [business] profits report total adjusted gross income below $ 50,000, and 95 percent report AGI less than $ 200,000," he said.

AGI is adjusted gross income before deductions and is typically much higher than taxable income.

"In fact, small-business owners are far more likely to get the earned-income tax credit than they are to pay at the top tax rate," McIntyre said.

Treasury's Tara Bradshaw said, "We didn't say they were all in that bracket." The numbers were meant "to give people an idea of how many stand to benefit" from the president's proposal.

One interesting thing the numbers did show is that the District remains something less than a hotbed of entrepreneurial activity. The Treasury listed 34,000 returns with non-farm proprietor income. No state was that low; even Wyoming, with fewer people, had 38,000. Of course, many entrepreneurs, even if they operate in a city, may prefer to live in the suburbs, where income taxes generally are lower.