Small Business Bankruptcy
By Mark J. Markus, Attorney at Law
A common scenario in today's society occurs when individuals own a corporation or are part of partnership or Limited Liability Corporation (LLC) and the business fails and then they have to deal with the various bankruptcy filing options. Many questions arise, such as should either or both the corporate business and individual owners file bankruptcy? If so, which chapter of bankruptcy should be filed? This article addresses a couple of the many issues involved.
Scenario #1:
Fred and Wilma own 100% of the shares of Dino Corporation. Dino Corp. makes gravel out of flint stones for Slate Gravel Company. Anyway, due to several lawsuits, and a slow down in business, Dino Corp. has to close its doors and shut down. Among its debts, the corporation owes money to the Internal Revenue Service for employee payroll taxes, money to vendors, employees, and to credit card companies. It also owes on a couple of lines of credit which are personally guaranteed by Fred and Wilma.Dino Corp. has some assets, mostly machinery and equipment, but also inventory of left over flint stone.
Fred and Wilma are now also being sued on some of the personal guarantees, and the IRS is coming after them for the employee payroll taxes.
Issues: Should Dino Corp. file a business bankruptcy? Should Fred and Wilma file bankruptcy? Or will their financial problems reduce their lives to a pile of Rubble? (apologies)
Analysis: The first thing to understand is that corporations do not receive discharges of its debts in a Chapter 7 (liquidation) bankruptcy case. Moreover, even if the corporation could get rid of its debts in a Chapter 7 case, it does not/would not affect the liability of the owners.
Even though they don't get a discharge of debts, there are still some good reasons at times to file a Chapter 7 bankruptcy for a corporation. For one, it allows the assets of the corporation to be sold and the proceeds disbursed by an independent bankruptcy trustee. This releases the owners of the burden and liability of undertaking these tasks. Additionally, it provides notice to all the corporation's creditors that the only assets from the now-defunct corporation will be liquidated and disbursed as part of the Chapter 7 case and, therefore, there's nothing left for them to file lawsuits to go after once the bankruptcy is completed. To see more on this, visit Small Business Bankruptcy.
Whether Fred and Wilma need to file their own bankruptcy can only be determined after a comprehensive consultation with a bankruptcy attorney, but it may be the only way they have to deal with their debts (which may include additional debts aside from those listed above, because this only lists their obligations that came from the corporation). Which chapter they would file depends on their personal asset situation, debts, income and expenses.
Owners of a corporation have personal liability for some, but not all, debts of a corporation. This includes employee payroll taxes (the trust fund portion under Internal Revenue Code 6672) and any debts which were personally guaranteed by them.
There are many other issues involved, as well as scenarios involving individual business owners (sole proprietor/dbas) and partnerships, but these will be the subject of future articles on small business bankruptcy.
About the Author:
Mark J. Markus is a Los Angeles Bankruptcy Lawyer serving bankruptcy clients in Southern California
Phone: (818) 509-1173
Website: Bankruptcy in Los Angeles
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