Closing A Business Without Bankruptcy

going out of business doorBankruptcy isn’t necessary to close a business with no future.

In fact, doing it yourself, outside of court, is often the better choice.

Winding up without bankruptcy

If you elect to close up shop outside of bankruptcy, you need to balance getting the job done as quickly as possible, so as to staunch the bleeding, against trying to get as much as possible for the assets.

If the business is a corporation, involve the board of directors.  Exploit the contacts and expertise of outside directors or other contacts in the field in the effort.

Identify the assets

Figure out what the business owns and what it might be sold for.

  • Intellectual property, work in development, customer lists; licenses; partnership relationships.
    Which of these assets be sold to raise cash?
  • Security deposits with landlords, taxing authorities,
    Can they be recovered by terminating lease, sub letting, or filing returns?
  • Real property leases:
    Is the price below market or in a desirable location, making the lease valuable to others?

List debts for which officers are personally liable

Check real property and equipment leases, credit cards, and trade accounts where the contract may be in the name of an individual or an individual has guaranteed the debt.

Officers, directors and those with check signing authority may be personally liable by law for the trust fund portion of unpaid employment taxes or sales taxes of the business.

Prioritize payments in light of the impact of unpaid debt on the business owners who will live on after the business is gone.

Segregate assets that are collateral for secured debts

Secured creditors have a legal interest in the asset and in the proceeds from its sale.  Creditors become secured creditors when the business granted a security interest in specified assets, usually at the beginning of the financial relationship. Sale of the asset without the permission of the secured creditor may breach the security agreement and may be a fraud on the secured creditor.

Leased property belongs to the lessor;  check the lease for any restrictions on assigning the lease to another entity.  Consult the lessor for its preferences for disposition of the asset.

Get fair market value for all assets sold

The value of the business’s assets belongs essentially to the creditors:  management cannot give the assets away or sell them for less than their value.

Remember,  thought, that the assets are only worth what someone will pay for them, here, now and in their present condition.

With that in mind, find the best deal for what you have to sell.  Sales may be for cash, for deferred payments, or for a piece of the future action, so long as you get a commercially reasonable, albeit liquidation, price.

Expose assets to the market, through brokers; contacts with competitors, suppliers, and partners;  listing with electronic auctions, etc.

Make a paper trail

Document the condition of assets, especially intellectual property, at the time of sale and your efforts to find a buyer in the time available.

If there is later a challenge to the disposition of assets, you have a record to support the sale at the price you received.

Develop plan for payment of debts to the extent possible

Pay trust fund taxes first:  ear mark the payment for application to the trust fund portion of the tax

Pay vendors or employees essential to the wind up process

Pay debts for which individuals are jointly liable with the business

Arrange for final tax returns and issuance of w-2’s to employees

Preserve records

Back up financial and other vital data now on computers so that the records remain available despite what happens to the computers it now lives on

Store paper records

If you are like most entrepreneurs, you’ll be back in business again, with lessons learned from a failure.

More on business and bankruptcy

When are shareholders liable for the business debts?

Payroll taxes and shareholders

When a corporate bankruptcy is best

Image courtesy of reinvented.

About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.