Selling or Closing a Business & Potential Legal Issues
Not every business takes off as planned, and many business owners fail several times before they succeed. While bankruptcy is a last resort that you can use, you may be able to recoup some of your losses and find a smoother exit by selling the business. Alternatively, you can close down the business and sell off the assets, which may give you enough in return to pay off creditors without formally filing for bankruptcy.
Selling a Business
Even if your business has been operating at a loss or not living up to your expectations, you may be able to find a buyer for it. A competitor may want to take over the customers of your business or perhaps its office or employees. Also, a potential buyer may have more secure financing than you do and may feel confident that they can ride out its problems. A buyer may also believe that they can manage the business differently in a way that may turn it around.
Unfortunately, the sale of a business sometimes does not produce enough cash to pay off its debts. As the owner of a small business, you may still be personally liable to creditors. You may be able to persuade a creditor to substitute the buyer of the business on the debt. Or you may be able to ask the buyer of the business, if they are in a good financial position, to indemnify you if the creditor seeks payment on the debt. If you have used your personal property to secure a debt, you can ask the creditor to transfer the security from your property to the buyer’s property.
Explore the Justia Lawyer Directory
While it is not always necessary to hire a lawyer when selling a business, it may be useful, especially if the transaction will be complicated or involves a large sum of money or a dispute with a co-owner. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.
To finalize the sale, you will need to complete a sale agreement. This should cover all of the inventory, assets, and liabilities of the business and provide the steps to follow during the transition. If your business is a corporation, the agreement will provide for the purchase of the corporation’s stock.
You can consider a few different options in terms of transferring ownership. One option is an outright sale, which allows you to transfer ownership and get payment immediately. Alternatively, you can arrange for a gradual sale, which may be more comfortable for a buyer who cannot pay the full price right away. A gradual sale involves a long-term payment plan that can be tailored to the needs of both parties. Finally, if you only want to transfer ownership temporarily and plan to return to running the business eventually, you can lease your business.
Transferring ownership may involve tax issues caused by the transfer of property, and transferring the ownership of a family business can be especially complicated. Your range of options also may depend somewhat on the form of your business.
Asset vs. Entity Sales
Whether a sale is structured as an asset sale or an entity sale will affect things like an owner’s taxes, their remaining liabilities, and how the sale will be executed. (The sale of a sole proprietorship will generally only be structured as an asset sale because there is no separate legal entity to sell.)
Closing a Business
If you are unable to find a buyer for your business, you may choose to simply close the business if it is not profitable. Business owners often can reach settlements with their creditors to pay them back a reduced amount of what they owe, which can allow both sides to avoid the headaches of bankruptcy. Owners of a corporation or LLC may be able to pay off the debts of a business to the extent that it has funds and then close it out. If the business is a partnership, a sole proprietorship, or another form in which the owner is personally liable for its debts, this may result in individual bankruptcy.
Bankruptcy for Businesses
Bankruptcy is usually only worth exploring if selling or closing the business proves impossible. You may be able to liquidate the business under Chapter 7 or pursue a reorganization plan under Chapter 11 or Chapter 13. Under Chapter 7, the assets of the business are sold off, with the proceeds being used to pay creditors to the extent possible. Whether you file as an individual or as a business under Chapter 7 depends on the business form and whether you are personally liable for business debts. Under Chapter 11, by contrast, you can keep doing business and spread out paying your debts to creditors over a period such as five years. Creditors or the judge will need to approve your reorganization plan.
Chapter 13 technically is not available for businesses but only for individuals. However, if you are a sole proprietor, you can file for individual bankruptcy under Chapter 13 and include the debts of the business. If you have the option to file under Chapter 13 rather than Chapter 11, this may have advantages. Chapter 13 tends to be a more efficient, less expensive process that involves fewer interactions with creditors. You also may have a better chance of getting your debts paid off for less than full value.