Is Bankruptcy Necessary?
Small businesses fail for various reasons, including many beyond the owner’s immediate control. It’s a reality of entrepreneurship, not every new business will succeed, and sometimes even long-standing companies hit hard times. The 2020 Coronavirus crisis has impacted small businesses more than almost any time in US history.
If you have decided your small business will not survive the Coronavirus crisis, we can help give you legal options to close or restructure the business.
Bankruptcy is an option when debt overwhelms a business, but is it the right one? Even when it is the best choice, there are different types of bankruptcy filings, each with its own advantages and disadvantages.
First, you have to determine if your small business is set up as a separate legal entity. This means you have a limited liability company (llc), corporation, or a partnership. It is critical if you are self-employed or using a trade name to talk to an attorney about your options. Understanding the basics can help reduce some of the fears and misconceptions that surround the word bankruptcy. Sitting down with an attorney to review options will help you understand your choices
If you do have a separate legal entity, then you have to consider your goals for yourself and the business. If you simply wish to shut down the business, you can often accomplish that without the cost and legal fees associated with a bankruptcy, and many times, there are benefits to not filing bankruptcy.
In evaluating whether bankruptcy is worthwhile for a separate legal entity, it is important to know what debts of the business entity the owner may owe personally. These would be debts that the business owner personally guaranteed, such as bank loans or leases. Most credit cards for a business are issued under the owners’ personal social security number and contain a personal guarantee. Also, if the business owes certain types of taxes (employee taxes, sales taxes, and certain others) those liabilities can pierce the corporate veil and carry liability over to the company owner's individually.
If you are personally responsible through guarantees for much of your business’ debt, then you need to understand a business bankruptcy does not eliminate your personal liability. We find that most of the time the owner needs to file a personal bankruptcy and let the business simply be closed without filing bankruptcy.
Important Considerations if Business is Troubled
DO immediately stop paying back all shareholder loans. This means if the company owes you money, you must put other creditors before the owners.
DO try to keep up to date on payroll expenses and all payroll taxes.
DO make sure to file all required federal and state taxes and get all filings (even if you cannot pay the taxes) up to date. Make sure you have copies of all companies records duplicated or stored where they will not be locked out by a landlord.
DO talk to an attorney or qualified professional about your options.
DON’T agree to provide personal guarantees to any lenders in exchange for extra time on debt extensions, or add co-signers to loans (especially spouses).
DON’T dispose of any business records.
DON’T decide to take money out of the business for business owners or family members, instead of paying business creditors.
DON’T transfer business assets to your personal name.
DON’T try to fix past mistakes on your own by immediately pledging collateral or signing new loan documents.
Giles & Lambert PC is glad to consult with you on whether a bankruptcy is a good option or if you need legal counsel to help close down a business. We provide a free 30 minute consultation to cover the basics, with any time beyond that available at a discounted hourly rate for the initial consultation. Contact us and we will provide a free memorandum giving you a broad overview of the options before you talk to us in person. Please remember this is intended to be a very general guide and does not provide specific legal advice for your situation.
If you wish to have a consultation on closing a business, we will ask you to complete a short intake form first so we can evaluate which attorney you should see, and provide you an estimate of how long we think a consultation will be, and if there will be any fees.