18 Jul Is Bankruptcy the Right Option For My Business?
Filing bankruptcy for your business can end the frustration and stress of trying to keep the â€œdoors openâ€ on a failing endeavor. But is it necessary?
If you have a sole proprietorship, you canâ€™t file bankruptcy just for the business without including all of your personal assets and debts. That may be a good thing, and will give you a â€œfresh startâ€ so you can get on with your life. After the bankruptcy, all of your debts; both personal and business; that can be discharged will be gone.
On the other hand, a Corporation or a Limited Liability Company (LLC) are separate entities and filing bankruptcy for that kind of business wonâ€™t involve your personal assets or debts.
So, should you file bankruptcy?
First of all, you probably wouldnâ€™t be thinking about this if your business was doing well. The economy has taken its toll on everything from personal debt to what were once thriving small businesses. When your Corporation or LLC fails there are several things you can do:
1. You can simply close the doors and walk away. The state will consider the business â€œinactiveâ€ and eventually you will have abandoned the name and entity.
2. You can properly dissolve the entity by notifying the state, selling any assets and using the money to pay creditors a pro-rata share.
3. You can file bankruptcy. The court will appoint a trustee who will take charge of gathering the business assets, selling them and distributing the proceeds appropriately.
Which is best? It really depends on the type of creditors you have and what you intend to do in the future.
If you want to continue to work in the same industry as the business, either by yourself or as an employee, than I donâ€™t recommend the first option. It will leave your customers and creditors with a bad taste in their mouth. And they will probably find you to demand some answers
Thus, the choice often comes down to the 2nd and 3rd options: dissolution or bankruptcy. Dissolution means you and your employees do the work. You are responsible to gather receivables, sell assets, and distribute the funds. In a bankruptcy, the trustee will do all of that, albeit she will need a lot of information and a little help from you.
Dissolution is generally less expensive than bankruptcy. If you do the paperwork yourself for filing with the state the costs are nominal. Even hiring an attorney to dissolve the Corporation or LLC is much less expensive than a small business bankruptcy.
But, sometimes itâ€™s worth the cost to just turn the whole business over to the trustee in bankruptcy and let your attorney and her work it out. And you can get on with your life. And, I have found that often creditors are quicker to give up trying to collect a debt when there was a bankruptcy. Without it, some creditors just wonâ€™t understand that a dissolved entity means they canâ€™t come after the owner.
These are tough decisions. A lot depends on individual circumstances. Whatever you decide to do, you need a good attorney to guide you through the process.
ï»¿Photo credit: Steve and Sara (via Flickr).
Latest posts by Douglas Jacobs, Esq. (see all)
- STUFF YOU KEEP IN BANKRUPTCY - January 31, 2016
- Bankruptcy And The Elderly - April 11, 2014
- Four Steps to a Successful Chapter 7 bankruptcy - March 11, 2014
- Thinking About Filing Bankruptcy? Now Might be the Right Time. - February 11, 2014
- The Debt and the Lien: Two Completely Different Problems - January 11, 2014