Should I Close My Small Business If I Want to File a Bankruptcy?

February 10, 2020
Should I Close My Small Business If I Want to File a Bankruptcy?

We often consult with clients who own a small business in distress.  If the business is not profitable, a Chapter 11 reorganization may allow the business to start fresh by reorganizing its debts.  If the owner doesn’t want to continue the business, though, the owner will cease its business operations.

It’s very rare to file a Ch 7 bankruptcy case for a business that is being closed. That would only happen if the business has significant assets that are not pledged as collateral for a lien to a secured creditor – again that’s pretty rare.  The real question is whether the business should be formally dissolved.

Generally we recommend leaving the corporate entity intact for 5 years after the business stops operating because if someone has a claim against the company, you want there to be a company for them to sue, rather than naming the owner personally as someone who may have received the assets of a dissolved company.  Keep in mind that if the business owner has personally guaranteed the debts of the business, the business owner will probably need to file a personal bankruptcy.

If the business owner wishes to dissolve the business then we should discuss this once we have a plan in place to file for bankruptcy.  Often we have the LLC or corporation’s owners prepare a short resolution in which they agree to dissolve.  Then they have to follow Kansas or Missouri state law to wind down the business (or another state if the business was organized or incorporated there).  Dissolving a business is a relatively easy set of affairs and we are able and willing to help with this process.

In Missouri, for instance, you have to issue a Notice of Winding Up with the Secretary of State if you operate an LLC.  That document gets filed (for a fee, of course!) and the LLC’s members need to hold a vote to dissolve.  That could be done, especially in the case of a single-member LLC, with a unanimous resolution.

State law governs how remaining assets have to be administered (unless the assets are administered by a bankruptcy trustee first).  When this is set, the creditors should receive written notice of a means to file a claim.  There are also articles of termination that can be filed (also for a fee!) to officially dissolve the business.

Why dissolve the business first?  It depends on what your goals are.  If the goal is to continue operating the business, you can decide between continuing the business in its current state or dissolving the business and starting over.  But if you have decided to cease running the business because you’re not making any money, you can do so prior to bankruptcy and provide an explanation to the trustee on how the assets of the business were handled and what, if any, debts remain.

Forming an LLC or incorporating a business is pretty simple.  Many people can do so with modest assistance from an attorney.  Dissolving a business is also pretty simple.  It’s part of our overall goal to maximize your financial health.  If you have a business you’re thinking of dissolving or that is in distress and you are contemplating a bankruptcy filing, talk to one of our attorneys to help you plan the order in which these steps happen.