Despite the White House's claim that the recession is now officially over, thousands of small businesses closed their doors in 2009 and thousands of employees lost their jobs.
Many clients contact me to discuss their failing businesses, wondering if they should file a "Chapter 11".
What most small business owners do not understand is that a Chapter 11 Bankruptcy is not dissolution of their business.
A Chapter 11 Bankruptcy is only effective for those businesses that are continuing to generate revenue, but are being hobbled by creditors taking judgments against them, restraining bank accounts, merchant credit card accounts or proceeding with evictions.
In that case, a Chapter 11 Bankruptcy will restrain the creditors long enough so that your client can use his revenue to reorganize his business and stay afloat.
But what happens when a small business owner is not generating enough revenue to continue his business? If a small business is being shut down by its creditors, and is not generating between $200,000 and $1,000,000 in revenue (depending on the business), then it may be time to walk away from the business, and not try to reorganize through a Chapter 11 Bankruptcy.
Is it necessary to file a Bankruptcy case when dissolving a business? No.
In most cases a corporation can simply close its doors and walk away from its debt.
If the corporation has no assets or inventory, then it is effectively "judgment-proof", which means that creditors who hold judgments will not be able to collect anything, since no bank accounts or inventory exist.
The corporation merely winds up its business according to the Business Corporation Law, files a final tax return, files a certificate of dissolution with the Secretary of State, and stops operating.
A corporate bankruptcy is not necessary.
Corporate liability vs.
personal liability However, if your client is a sole proprietorship, then he is personally liable on all the business debt.
Also, even though a small business owner has formed a corporation, he must still examine his debts to determine whether personal liability may remain on the business debt.
Some business debt may in fact be personal debt.
Closing the business and dissolving the corporation will not relieve your client of personal liability arising out of some of that business debt.
For example, your client may have placed personal guarantees on the commercial lease or on his credit line with the bank.
That credit card that your client "only uses for the business" may in fact be a personal credit card, even though the business name is on the card.
Inventory on consignment or utility accounts may have personal guarantees incorporated into them.
Sales tax and employment tax liability may be passed through the corporation as personal debt.
Only a business professional can review these agreements to ascertain whether your client is personally liable on that particular business debt.
Is it necessary to file a personal Bankruptcy after your client dissolves his business? Sometimes A personal Bankruptcy case will be necessary if enough of the corporate debt was personally guaranteed by your client.
In that case, of course, your client will have to determine, just as any other client that has overwhelming credit card or mortgage debt, whether he is eligible for a personal Bankruptcy and whether it is the right choice for that client.
Most common warning signs of a failing business • Payables to creditors are more than 90 days due.
• Overstocked inventory is not selling.
• Rent is overdue more than 90 days or the Landlord has already taken your client to court and he is operating on a stipulation to pay his current rent and repay the arrears.
• Judgments have been entered against the business by creditors and the Marshal is at the door.
• The corporate bank account or merchant credit card account has been restrained by a creditor.
• The bank has capped the business credit line and is demanding a pay down of the existing line.
• Vendors have stopped shipping new merchandise until payables are cleared.
• Expenses, including rent, salaries and utilities exceed the gross income from sales.
• Your client is not taking home a salary, but living off a spouse's salary or a home equity line of credit.
Remind your clients: Thomas Edison failed more than 1,000 times before perfecting the light bulb! Many famous CEO's formed and dissolved many corporations before becoming successful!