Winding up a failed business
By Cathy Moran, California bankruptcy lawyer on Dec 26, 2007 in General Bankruptcy Information, Small Business And Self-Employment
The literature on starting a business is endless; advice on going out of business scant. Here are some thoughts on what to do when you’ve made the painful decision to shut down: my checklist of tasks when ownership has decided to close a business without a bankruptcy.
- Liquidate business assets for the best price available under the circumstances.
- Return assets owned by insiders to those who lent them to the business.
- Document assets transferred to insiders, including the value of the asset and the consideration given for, or debt satisfied by, the transfer.
- Cancel insurance and workers compensation policies, and recover any unearned premiums or deposits.
- Notify lessors of equipment or vehicles and arrange return of the leased property.
- Notify the landlord for any leased real estate so that the landlord can begin looking for a new tenant. The landlord must usually mitigate his damages by seeking a new tenant, reducing the landlord’s damages collectible from the departing tenant.
- Make sure that business books reflect any loans from insiders which may be tax deductible to the lenders.
- File final tax returns (income, employment, and sales) for the entity, even if the business can’t pay the tax shown on the return.
- Preserve books and records for the three years preceding closure. Back up data kept on computers.
Creditors of the failed entity are entitled to application of the proceeds of the business’s assets to their claims. They are not entitled to payment from the owners of a corporation or LLC unless they hold the personal guarantee of the owner. Unpaid creditors can sue a defunct corporation, but that judgment is worthless unless the corporation has assets.
Insiders, officers, members and shareholders, need to assess which of the business’s debts they are personally liable for. Frequently, business landlords or lessors require personal guarantees. State and federal law may hold managers or owners liable for trust fund taxes that were collected but not paid over to the government. SBA loans are often personally guaranteed. When the corporate assets are exhausted, entities that hold a guaranty will seek payment from the guarantor. The final step is for the individuals to assess their personal exposure. More on deciding whether a corporate bankruptcy makes sense.
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