As mentioned in Part I and Part II of this Business Exit Strategies series, everything comes to an end eventually and businesses are no exception to that rule. Because some sort of end to your business is inevitable (whether the business ends or you move on from it), it is advisable to make a plan that covers how you would like to either dissolve your business or pass it on to new leadership.
In this last installment in the series, we discuss the two most final options: liquidation and bankruptcy.
Exit by Liquidation
As a business exit strategy, liquidation is the most final decision you can take. Should you choose to liquidate your business, you’ll be closing down permanently and disposing of the business assets via sale.
It’s worth saying that liquidation does not mean that you have necessarily failed in business. It is simply the end of a business’ natural life – a way to properly dissolve a business administratively and end all trading.
Once a business is liquidated, all of its debts are paid and its owner’s shares are “cashed in”. Once this is done, and if there is any cash left in the company, then it is liquidated as well and can be taken out of the company by the entity’s owner(s). After that, the company ceases to exist and you’ll not need to worry about that business or its legacy again.
There are some areas where principals dissolving their businesses need to beware. One area where business owners need to be careful is in the administrative shut-down of the business. In Florida, that means winding up the business using the company dissolution functionality available via the Sunbiz.org website. It is important that this is done properly and before the Secretary of State closes the business down for non-compliance purposes. Otherwise, an inactive company can become dissolved for, say, not completing an annual report. In such a case, a future lawsuit can still be filed against the entity which would cause the business to be opened again just for the purpose of serving as the defendant in a suit. By contrast, once properly dissolved, no legal action can be taken against the company in the future (though in some limited cases, civil action can be taken against the company’s former principals).
This pitfall aside, there are other disadvantages to simply dissolving a company rather than attempting to sell it or take advantage of the other exit options in this series. Firstly, you are unlikely to benefit financially as much as you would in a company sale or other form of share buyout. Secondly, the finality of it all can strain important relationships such as those you have with your clients, employees, vendors and other stakeholders. Should you aim to do business again in the future, then you may regret having left these individuals in limbo by closing your business.
“some sort of end to your business is inevitable (whether the business ends or you move on from it),”
Exit by Bankruptcy
When bankruptcy occurs, a business has its assets seized and liquidated by a court of law in order to pay back creditors.
Few businesses ever find themselves planning for bankruptcy. In fact, only 3% of companies end in bankruptcy, with the vast majority of these being unplanned.
Whereas business dissolution does not necessarily mean failure, bankruptcy almost always is a hallmark of a business’ unintended end… and therefore most people try to avoid it. Bankruptcy can also be very complicated and costly with long-lasting consequences so it’s not the best option for many businesses.
Because of its unfavorable characteristics, bankruptcy is often the last resort for businesses saddled in debt with no other options to exit or continue trading.
There are three common types of bankruptcies available to businesses, chapter 7, chapter 11 and chapter 13.
An experienced attorney can help you to differentiate between the different types of bankruptcy options and decide if any or which one is the best for your particular situation.
Chapter 7, or straight bankruptcy, is by far the most common type of bankruptcy. Under Chapter 7, you immediately surrender your assets for them to be liquidated. The money is then used to pay down your unsecured debts. These are debts not secured with collateral, including most personal loans and credit cards.
Qualifying single proprietors can file for Chapter 7, as well as partnerships, LLCs or corporations as long as they have assets that can be liquidated to cover debts..
Chapter 11 is the form of bankruptcy usually utilized by enterprise-sized businesses. In Chapter 11 bankruptcies companies reorganize themselves and in the process restructure their debts so that creditors can be paid over time. Although it is a mainstay of larger corporations, it can be used by smaller businesses that don’t qualify for Chapter 7 or Chapter 13. Chapter 11 is more complex and often more expensive than the other two bankruptcy filing options.
Chapter 13 is the second most common type of bankruptcy and is used more by individuals rather than businesses. In the Chapter 13 process debtors create a repayment plan to pay back all or a portion of what they owe over either three or five years. Monthly payments are then made to a trustee nominated by the court. This trustee then pays the funds to the individual creditors. At the end of the three or five-year term, the remaining unpaid debts are written off or canceled..
The Importance of Legal Counsel
The decision to declare bankruptcy is not a light one and should be taken in tandem with an experienced attorney with a track record in business bankruptcy law. Because bankruptcy involves the courts, it is important to hire lawyers who can help you to navigate the court system.
While other forms of business dissolution are less complex, the involvement of a good attorney can protect you and your interests from administrative hurdles and technicalities that can become legal challenges down the line.
South Florida Law
The business attorneys at South Florida Law, PLLC are experienced in aiding business owners with challenges that occur at all stages in the business cycle – and do so with the best interests of your business in mind. We also have extensive experience in advising on corporate and business strategies for those looking to dissolve businesses or declare bankruptcy. As a boutique law firm, we offer the advantage of partner-level involvement at every step in the process. This small firm attention to detail is coupled with big firm resources that rival those with much larger offices in the legal industry. Faced with business bankruptcy? Dissolving a business? Contact South Florida Law today on (954) 900-8885 or via our contact form.