When a small business is not doing well, or when its owners want to start another chapter in their lives or careers, there are many ways to get out of a business – liquidate, merger, bankruptcy.
In evaluating which route to take, the entrepreneur might first review the business’ debts. The liabilities a business has may be a deciding factor in how to end a business. Taxes, loans and rent are a few types of debts to look over
As to taxes, the Internal Revenue Service requires business owners, regardless of structure, whether sole proprietor, partnership, or Limited Liability Company, to be personally liable for unpaid payroll taxes. This could put a business into financial distress if the company does not pay its taxes. When a business has employees, payroll taxes include withheld Federal and state income taxes, Social Security and Medicare taxes, and unemployment insurance taxes. For the business suffering financially, bankruptcy may not be the road out of debt if most of the business’ debts are taxes. Filing bankruptcy does not discharge payroll taxes, for example, though filing bankruptcy may help to discharge other debts and free cash to pay payroll taxes. IRS Publication 908 – Bankruptcy Tax Guide details the tax consequences when filing bankruptcy.
With respect to loans, if a small business owner has a lot of loan debt, the owner needs to review how the loan was taken out, whether in the name of the owner or the business. Selling off assets or liquidating may not be the way to end a business if an owner has taken out a loan in the owner’s name, and not the business name. This is because in liquidation, the lender can go after the owner’s personal property to pay off the loan though the loan was used to fund the business.
With respect to rent, if a business owes back rent to a landlord, the owner is personally liable when it is a sole proprietorship or when a partner in a partnership, shareholder in a corporation, or member in a Limited Liability Company personally guarantees the rent. If the owner does not want the landlord to take personal property, filing bankruptcy or merging with an entity that has assets to pay off the past due rent may be the answer.
These are just a few issues to keep in mind when determining and implementing a strategy to end a business, and deciding whether bankruptcy is the path to take to get out of financial distress.
Contact an experienced New York bankruptcy attorney to learn more about how to deal with financial stress.