In determining the chapter to file under for bankruptcy, a business should consider the business’s most significant debt. Is it payroll taxes? A loan? Past due rent? Unsecured creditors?
If the source of debt is taxes, like some of the claims against The Amish Market, the Internal Revenue Service (IRS) holds all business owners personally liable for unpaid payroll taxes, regardless of business structure (corporation, sole proprietor, partnership, limited liability company). Payroll taxes include withheld state and federal income taxes, Medicare and social security taxes, state disability insurance, and unemployment insurance taxes. Bankruptcy does not discharge payroll taxes, or most other taxes. Since bankruptcy is not much help when the majority of business debt is taxes, bankruptcy may not be an option.
Not paying taxes on time could result in penalties. To take care of taxes, engage an experienced New York bankruptcy attorney, not an accountant, to negotiate a payment plan with the IRS or to offer a compromise that is less than what a business owes. If a business owner does nothing, the IRS may take personal property to satisfy the debt. IRS Publication 908 – Bankruptcy Tax Guide discusses the tax consequences of bankruptcy. There are also discussions on bankruptcy in the Form 1040 instructions booklet. When in bankruptcy, debtors continue to file appropriate tax forms and deposit payroll taxes withheld for employees.
If a business owes suppliers, or unsecured debt, such as the disputed real estate broker commissions in The Amish Market case, the sole proprietor or partner may be personally liable. Under the Uniform Commercial Code, vendors usually have the right to take the goods back. For a corporation or limited liability company, unsecured debt is rarely personally guaranteed. Vendors may be out of luck when a corporation or limited liability company has no assets because an owner is protected from personal liability. A shareholder or limited liability owner with only unsecured, unguaranteed business debt may not need to file a personal bankruptcy to get rid of business debt.
A debtor in New York should engage an experienced bankruptcy attorney to determine the bankruptcy options to take care of business debt.