Owning a small business can amplify the ups and downs that come with any career. When business is good, you may feel on top of the world, and can consider expansion and even franchising plans. When business is bad, you may fear that your entire livelihood and family's financial security could come tumbling down. If your business revenue seems to be steadily declining or you've taken on debt in an attempt to stay afloat, you may be wondering when (or whether) it is time to pull the plug for good. How do you know whether you should file for bankruptcy or simply close your business? Is it possible to re-emerge from your negative business cycle? Read on to learn more about the practical differences between a business bankruptcy and dissolution.
What effect will a bankruptcy have on your business?
While you may equate a corporate bankruptcy with going out of business, the true purpose of a Chapter 11 bankruptcy is actually to reorganize your debts to help you stay in business. When you file for Chapter 11 bankruptcy protection, your debts will be "frozen" -- your business will continue to owe these debts unless they are reduced or discharged by the bankruptcy court, but you won't be obligated to make your monthly payments on anything but certain priority items until the case has concluded. You can opt to file this case voluntarily, or you may find yourself pushed into bankruptcy court if you stop making payments on business debts and your creditors force you into court.
After you've found yourself in bankruptcy court, the trustee will investigate and compile all your business debts. You'll be required to turn over a certain percentage of your business's revenue, and the trustee will use these funds to pay the business debts in order of priority -- similar to a Chapter 13 repayment plan for individual debtors. Certain debts may even be discharged through a Chapter 11 bankruptcy, allowing your business a fresh start after your repayment plan has ended.
In many cases, bankruptcy may be a logical way for a business to streamline and reorganize debt, or to put your assets to their highest and best purposes in tackling this debt. When you're in the weeds with a rapidly-expanding business, you may not always make the wisest long-term decisions, and a bankruptcy can help you put your finances in better order to continue future growth.
However, if you operate your business in a small community, the (often undeserved) negative publicity that can come from a corporate bankruptcy may do more harm than good when it comes to turning your business around.
When may dissolving your business and closing the doors be a better idea?
While a Chapter 11 bankruptcy can operate as a life preserver to a business struggling to stay afloat, in some cases you may be better served focusing your energy and efforts on the legal and financial unwinding of your business affairs. If your business's current financial situation is due to factors that are both outside your control and are not likely to soon change (like a law restricting the sale of one of your highest-profit items, or the construction of a national pizza franchise across the street from your mom-and-pop pizza joint), dissolution may be the natural choice.
If you do choose to dissolve your business in the face of financial challenges, it's important to do so in accordance with your state's laws. For example, prematurely terminating a lease could subject you to additional charges you may not be able to afford. Before taking decisive action, you'll likely want to consult an attorney who deals exclusively with business transactions so that he or she can evaluate all the circumstances surrounding your cash flow issues and help you make an informed decision. Contact a firm like Wiesner & Frackowiak, LC to find a bankruptcy attorney.