You need to file bankruptcy, but you have a corporation or limited liability company–maybe even more than one. What happens to your company when you file? Does the company need to file bankruptcy, too?
First, some basic concepts
To borrow a phrase my maternal grandmother was fond of, I’ve had a Dickens of a time dealing with this issue in my Charleston bankruptcy practice. The first thing you need to understand is that your company–I’ll use that term to refer to your limited liability company (LLC) or corporation–is a different person under the law. When I explain this to my clients, I refer to the company is “Fred.” After getting puzzled looks for a second or two, I point out that I’m just trying to drive home the point that YOU (the client) and your company are two different people under the law. Just because you file, doesn’t mean Fred has filed bankruptcy. So get this very basic concept down: you and your company are not the same.
So do both Fred and I file?
Thank you for referring to your company as “Fred.” We’re making progress here. The answer is usually no, if we’re talking about Chapter 7 bankruptcy. Chapter 7 is a “liquidation” bankruptcy. All it does for companies is give them a decent burial. The trustee simply evaluates the assets of the company and sells them to pay the company’s creditors. In most instances with small “closely held” companies, there’s simply nothing for the trustee to distribute.
And then there’s the taxes and your (in)sanity…
First, in situations where there are assets and those assets are being pursued by creditors and the company owes payroll taxes, filing Fred’s bankruptcy may be very helpful. Owners of small companies are typically liable for payroll taxes. And for the most part, payroll tax liability is non-dischargeable in bankruptcy. Rather than allowing the creditors (lenders, vendors, etc.) to satisfy their debts, it’s better to file bankruptcy for Fred to stop all the collection activity. Tax claims are “priority” debt, so they’ll typically be paid right after costs of administration of the case–the trustee’s fees.
Second, filing bankruptcy allows Fred to quickly shut down and stops creditors from continuing litigation or other collection efforts. Even though you (the owner) may not be the target of these collection efforts, creditors can still subpoena records, send nasty letters, continually call you, and depose you about Fred’s financial situation. Sometimes it’s best to file bankruptcy for Fred so that you only deal with one person, the bankruptcy trustee, on these issues. (For more information on this, read “Filing Chapter 7 Bankruptcy for Your Company” and note that there is a third reason for filing your bankruptcy for your company discussed in that post.)
Even if you don’t file Fred’s bankruptcy, he’s still important
Remember, when you file bankruptcy, you must list all your assets. That means your interest in Fred. The value is determined by compiling a basic balance sheet of assets and liabilities. It might sound complicated, but it’s not. In most cases, there’s no net value because Fred has far more debt than it has assets. For more on this, see “Bankruptcy, Balance Sheets, and Fred.”
Also, to calculate your income, you need to be able to generate profit and loss statements based on the company’s income and expenses. Even if you file individually, you need to know about Fred’s financial health–or lack thereof. This information will be required when you file bankruptcy. For more information on profit and loss statements, see “Profit and Loss Statements for Bankruptcy.”
So while you generally don’t file bankruptcy for your company, it’s value, profit, and existence will still be highly relevant to your own bankruptcy case.
Post script: If your name is Fred, please substitute another name for Fred as you read this post. Any other name will do. It could be Richard, or Francis, or Wayne. Take your pick. And if you don’t file bankruptcy for Fred (or Richard, Francis, or Wayne), you can simply dissolve the company under state law. (Click here for Articles of Dissolution for Corporations and here for Articles of Termination for a Limited Liability Company.)