Statistics show that many new businesses fail within the first five years. This statistic is bleak to say the least. The reality of the economy makes it hard for many business owners to keep the ship afloat. The first step in determining if a bankruptcy is best for your situation is an evaluation of the legal structure of the business. The following business structures represent the legal classifications: a corporation, a partnership, and a proprietorship. Partnerships, limited liability companies, and corporations are all business entities that exist separately from the partners or shareholders. Bankruptcy law allows these entities to file bankruptcy under a Chapter 11 or Chapter 7.
Business Legal Organizations and Their Structure
A business that is a proprietorship is an extension of the owner of the business. The proprietor must file the bankruptcy under his or her name. Any liabilities or assets of the business are just assets or liabilities of the owner. The business owner can file one of the following three bankruptcy types: Chapter 7, Chapter 11, or Chapter 13. Eligibility is based on debt limits being met.
What Bankruptcy Filing is Most Appropriate for the Business
In some cases it is more beneficial for a company to liquidate. This is a Chapter 7 filing. The slate is wiped clean and all debts are dismissed. Other companies are most benefited by a reorganization. The Chapter 13 or Chapter 11 are more suited for this type of filing. The crucial piece of evidence is the reason why the company fell into debt problems. The reason for the debt problems is a powerful indicator for what future steps should be taken.
Furthermore, a company reorganization will not help certain issues. For instance, if the problem was a poor target market, the reorganization will not help. If poor gross revenue was involved, the reorganization is not the key. If there is a poor fit between the skills in the company and the skills needed to run the company, the reorganization will not do the trick. The main benefit of a company reorganization is to free up cash. This cash can be used to pay current lease fees, renegotiate current contracts, and prevent the loss of important assets.
Another option is the liquidating Chapter 13 or Chapter 11. This action can give the business owners time to sell the business in a responsible manner. The pressure being relieved enables them to not sell everything in a haphazard manner. The proceeds from the sale can be used to pay back taxes or unpaid salaries. Also, jobs can be saved because the new ownership may keep some of the staff already onboard. If the action is no longer needed, the action can be converted into a Chapter 7 filing, or be dismissed conditionally.
If the business decides to pursue the Chapter 11 reorganization, this option is time consuming and requires serious effort. Both the owners and managers must be careful to comply with all of the rules of the Chapter 11. This can be arduous and tedious; the company must truly commit to the process if it is going to be successful. This process is expensive, and it requires owners and managers to consult with creditors and legal counsel.
Furthermore, the company must provide a clear account of the state of the company’s finances. This information must be shared with the court and the creditors. This information must be shared throughout the proceedings and is considered the bankruptcy bargain. In essence, the company gets a little breathing room for sharing or disclosing financial records.
The Realities of Company Reorganization
A reorganization can truly put more stress on an already tight situation. The process will drain management’s time and energy. Time and money that must be dedicated to the reorganization process are significant. If a company can not commit to it financially and physically, this may not be the best course of action for the company. In reality, most reorganizations tend to fail. A lack of a good plan is usually the culprit of the failure.
In many cases, it is just simpler to liquidate the business. This is especially true if the company has relatively few costs and assets. The company can then start a fresh. This strategy works best for companies that do not require many assets. The decision is not easy to make, and it is important to consult an experienced attorney.
Chapter 7 is probably the best choice for a company that has no future. Companies that have excessive debts are probably the best candidates for the Chapter 7. In contrast, corporations do not get to have discharges. The Chapter 7 in corporations just provides an orderly way of liquidating the company under the trustee. Creditors are promised that they will be paid under the liquidation according to the time frame of their claim. The trustee is in charge of handling these things with the creditors.
In conclusion, bankruptcy for businesses is more complicated than for individuals. There are more laws that apply, and there are usually more players in the game. The laws for businesses are dramatically different. The process is basically the same. The Chapter 7 is a full dismissal. The Chapter 11 and Chapter 13 are reorganizations that are meant to get the company back in good health financially. The success of the reorganization is largely due to legal counsel and management.
