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Do you ever file personal chapter 7s for people who want to keep their small business running?
Old co newco. This is a very simple formula. If you take a sole prop and incorporate it, the debts of old co are owed by newco. Goodwill is an asset of oldco. A client list is an asset of oldco. Transferring them without enough consideration to pay oldco's creditors is fraud. There are legions of cases which say this.
If you want to personally be liable for this fraud, conspire with your clients to commit this fraud.
D
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On Aug 17, 2010, at 2:08 AM, Mark T.Jessee wrote:
Perhaps I missed some nuanced fact in this string, but unless there are business assets which a trustee would liquidate in a chapter 7, I am not following Dennis' logic. I usually see more harm than benefit to the debtor by waiting to incorporate postpetition instead of incorporating prepetition.
Incorporating prior to the bankruptcy appears to usually provide the smoothest outcome for the debtor if there are no nonexempt business assets. Shutting down the business will cause the loss of income to the debtor and the loss of key components to the business, i.e. the telephone number, office space, employees, customer lists, etc. That is not something the debtor can conveniently replace when incorporating a new business postpetition. Incorporating prepetition prevents these hits to the business operation. There is no distinction between the debts of a debtor and debts of the debtor's sole proprietorship. Debts of the sole proprietorship do not attach to any particular assets unless specifically secured by that asset through a valid security agreement or by operation of law. If a prospective debtor incorporates a sole proprietorship prepetition, the assets transferred and used to fund the corporation are in return for the stock being issued in
the prospective debtor's name. The debts do not attach to the corporation. The shares of the stock of the corporation are the prospective debtor's asset instead of the specific business assets. As most small businesses in this situation do not usually have any significant goodwill value without the business principal working in transition with a new owner, and since a chapter 7 trustee cannot force a debtor to work for a new business owner, it really comes down to an analysis of the likely value after liquidation of assets. Liquidating a sole proprietorship only involves assets. Liquidating a corporation requires payment to corporate creditors first before anything is distributed to the shareholder trustee. With appropriate prebankruptcy planning incorporating a new business will have normal creditors, office lease, employee salaries, payroll and/or sales taxes, utilities, etc. From a practical point it makes an incorporated business less
enticing to liquidate than a sole proprietorship.
Looking at sole proprietorship vs. corporation in completing the means test also favors prepetition incorporation. Ever since the Wiegand BAP decision 2 years ago holding that business expenses cannot be deducted from business income in determining current monthly income, speakers at our group's monthly meetings constantly recommend incorporating a sole proprietorship prior to filing a bankruptcy case. That way only the gross revenue received by the debtor is counted instead the gross receipts of the business in determining cmi and whether a debtor is above or below median income. Granted Weigand was a chapter 13 case, but the same principal applies in chapter 7 marginal cases if a trustee or creditor asserts that business expenses should not be included in determining cmi in chapter 7 based on the Weigand analysis.
Absent nonexempt business assets likely to be administered by a chapter 7 trustee, I recommend incorporation to prospective debtors that have employees or have the type of sole proprietorship business a trustee is likely to shut down due to liability issues.
Mark T. Jessee
Law Offices of Mark T. Jessee
"A Debt Relief Agency"
50 W. Hillcrest Drive, Suite 200
Thousand Oaks, CA 91360
(805) 497-5868
On Mon 16/08/10 1:21 PM , Dennis McGoldrick easky1@yahoo.com sent:
bk first. New Inc. after bk filed. All of old co's nonexempt assets, phone, etc., to trustee.
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Perhaps I missed some nuanced fact in this string, but unless there
are business assets which a trustee would liquidate in a chapter 7, I
am not following Dennis' logic. I usually see more harm than benefit
to the debtor by waiting to incorporate postpetition instead of
incorporating prepetition.
Incorporating prior to the bankruptcy appears to usually provide the
smoothest outcome for the debtor if there are no nonexempt business
assets. Shutting down the business will cause the loss of income to
the debtor and the loss of key components to the business, i.e. the
telephone number, office space, employees, customer lists, etc. That
is not something the debtor can conveniently replace when
incorporating a new business postpetition. Incorporating prepetition
prevents these hits to the business operation. There is no
distinction between the debts of a debtor and debts of the debtor's
sole proprietorship. Debts of the sole proprietorship do not attach
to any particular assets unless specifically secured by that asset
through a valid security agreement or by operation of law. If a
prospective debtor incorporates a sole proprietorship prepetition, the
assets transferred and used to fund the corporation are in return for
the stock being issued in the prospective debtor's name. The debts
do not attach to the corporation. The shares of the stock of the
corporation are the prospective debtor's asset instead of the specific
business assets. As most small businesses in this situation do not
usually have any significant goodwill value without the business
principal working in transition with a new owner, and since a chapter
7 trustee cannot force a debtor to work for a new business owner, it
really comes down to an analysis of the likely value after liquidation
of assets. Liquidating a sole proprietorship only involves assets.
Liquidating a corporation requires payment to corporate creditors
first before anything is distributed to the shareholder trustee.
With appropriate prebankruptcy planning incorporating a new business
will have normal creditors, office lease, employee salaries, payroll
and/or sales taxes, utilities, etc. From a practical point it makes
an incorporated business less enticing to liquidate than a sole
proprietorship.
Looking at sole proprietorship vs. corporation in completing the
means test also favors prepetition incorporation. Ever since the
Wiegand BAP decision 2 years ago holding that business expenses cannot
be deducted from business income in determining current monthly
income, speakers at our group's monthly meetings constantly recommend
incorporating a sole proprietorship prior to filing a bankruptcy case.
That way only the gross revenue received by the debtor is counted
instead the gross receipts of the business in determining cmi and
whether a debtor is above or below median income. Granted Weigand was
a chapter 13 case, but the same principal applies in chapter 7
marginal cases if a trustee or creditor asserts that business expenses
should not be included in determining cmi in chapter 7 based on the
Weigand analysis.
Absent nonexempt business assets likely to be administered by a
chapter 7 trustee, I recommend incorporation to prospective debtors
that have employees or have the type of sole proprietorship business a
trustee is likely to shut down due to liability issues.
Mark T. Jessee
Law Offices of Mark T. Jessee
"A Debt Relief Agency"
50 W. Hillcrest Drive, Suite 200
Thousand Oaks, CA 91360
(805) 497-5868
On Mon 16/08/10 1:21 PM , Dennis McGoldrick easky1@yahoo.com sent:
bk first. New Inc. after bk filed. All of old co's nonexempt
assets, phone, etc., to trustee.
--- On SAT, 8/14/10, HOLLY ROARK __wrote:
Subject: Re: [cdcbaa] Do you ever file personal chapter 7s for
people who want to keep their small business running?
To: cdcbaa@yahoogroups.com
Date: Saturday, August 14, 2010, 11:04 PM
So then BK as a sole proprietor, possibly shut down, and then
start newco? Holly Roark CDCA holly@roarklawoffices.com [1]
On Sat, Aug 14, 2010 at 10:53 PM, Dennis wrote:
Old co new co in this situation. New co owes all of old
co's debts. Bk of principal does not help newco as it owes old co's
debts. Must Bk, then start newco. Never start newco before Bk, as
you carry old. Co's debts past the Bk. D
Sent from my iPhone
On Aug 14, 2010, at 3:10 PM, "Larry" wrote:
In Santa Barbara, I have had clients keep their business going with
both Corporation and LLCs. I would never take a small business
owner into a ch7 without an INC or LLC . More likely than not the
business is struggling, shutting it down for any length of time would
be catastrophic. It only costs $100.00 to file articles of
incorporation. The client can then make the S Corp tax election.
For most small businesses, an S corp election is cheaper the $800/yr
minimum California tax on LLCs AND the FTB wants the $800 within 4
Larry Webb
State Bar of California 229344
Central District California
"A Debt Relief Agency"
Larry@webbklaw. com
Law Offices of Larry Webb
Camarillo Ca 93010
P 805.987.1400 805.987.1400
F 805.987.2866
C 805.750.2150 805.750.2150
FROM: cdcbaa@yahoogroups.com [4] [mailto:cdcbaa@yahoogroups.com [5]]
ON BEHALF OF Holly Roark
SENT: Saturday, August 14, 2010 2:49 PM
TO: cdcbaa@yahoogroups.com [6]
SUBJECT: Re: [cdcbaa] Do you ever file personal chapter 7s for
people who want to keep their small business running?
If the debtor incorporates, though, then there's a better chance
that the debtor can keep it up and running? Does it make a difference
whether it is an Inc. or an LLC?
I am glad to see all the discussion on this topic.
--
Holly Roark
holly@roarklawoffices.com [7]
www.roarklawoffices.com [8]
Central District of California
Consumer Bankruptcy Attorney
--
Holly Roark
holly@roarklawoffices.com [9]
www.roarklawoffices.com [10]
Central District of California
Consumer Bankruptcy Attorney
Links:
[1]
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Old co new co in this situation. New co owes all of old co's debts. Bk of principal does not help newco as it owes old co's debts. Must Bk, then start newco. Never start newco before Bk, as you carry old. Co's debts past the Bk.
D
Sent from my iPhone
On Aug 14, 2010, at 3:10 PM, "Larry" wrote:
In Santa Barbara, I have had clients keep their business going with both Corporation and LLCs. I would never take a small business owner into a ch7 without an INC or LLC . More likely than not the business is struggling, shutting it down for any length of time would be catastrophic. It only costs $100.00 to file articles of incorporation. The client can then make the S Corp tax election. For most small businesses, an S corp election is cheaper the $800/yr minimum California tax on LLCs AND the FTB wants the $800 within 4 months of filing.
Larry Webb
State Bar of California 229344
Central District California
"A Debt Relief Agency"
Larry@webbklaw. com
Law Offices of Larry Webb
Camarillo Ca 93010
P 805.987.1400
F 805.987.2866
C 805.750.2150
The post was migrated from Yahoo.
In Santa Barbara, I have had clients keep their business going with both
Corporation and LLCs. I would never take a small business owner into a
ch7 without an INC or LLC . More likely than not the business is
struggling, shutting it down for any length of time would be catastrophic.
It only costs $100.00 to file articles of incorporation. The client can
then make the S Corp tax election. For most small businesses, an S corp
election is cheaper the $800/yr minimum California tax on LLCs AND the FTB
wants the $800 within 4 months of filing.
Larry Webb
State Bar of California 229344
Central District California
"A Debt Relief Agency"
Larry@webbklaw. com
Law Offices of Larry Webb
Camarillo Ca 93010
P 805.987.1400
F 805.987.2866
C 805.750.2150
The post was migrated from Yahoo.
This is a complex issue for a trustee. Once the case is filed the business is property of the estate. Believe it or not, the trustee then is like an owner and cannot negligently let the business be operated. Anyone gets injured on the premises and the trustee is a defendant. There is NO reason for a trustee to take this risk.
But, think about it. If your client had a shoe shine stand at the airport, not likely the trustee sends someone to the airport to stop your client from shining shoes. Trustee gets just $60 per no asset case and cannot afford to send someone out to close each no asset shop. So, if there are assets to liquidate, the trustee will have money to close the business. If no money, it is a matter of the level of risk.
D
Sent from my iPhone
On Aug 14, 2010, at 7:39 AM, "Law Offices of Jonathan Leventhal" wrote:
I have done a 7 for a client that owned (and still owns) a wheel alignment business. The Trustee did not even blink an eye about the business.
However, I had the client sign a paper stating he understood the risks involved with filing and having a business.
Jonathan
Jonathan D. Leventhal, Esq.
This email and any attachments thereto may contain private, confidential, and privileged material for the sole use of the intended recipient. Any review, copying, or distribution of this email (or any attachments thereto) by others is strictly prohibited. If you are not the intended recipient, please contact the sender immediately and permanently delete the original and any copies of this email and any attachments thereto.
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I have filed numerous 7s for debtors with businesses (selectively, of
course), and never been asked to shut them down. Maybe I'm just lucky, or
the tide has turned, and I'm Wile E. Coyote standing in air off a cliff
unaware of it. As others have pointed out, make sure the business is fully
insured for liability purposes. So, I guess I'm basically concurring with
Eric. Hale
_____
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I have done a 7 for a client that owned (and still owns) a wheel alignment
business. The Trustee did not even blink an eye about the business.
However, I had the client sign a paper stating he understood the risks
involved with filing and having a business.
Jonathan
My Card
Jonathan D. Leventhal, Esq.
This email and any attachments thereto may contain private, confidential,
and privileged material for the sole use of the intended recipient. Any
review, copying, or distribution of this email (or any attachments thereto)
by others is strictly prohibited. If you are not the intended recipient,
please contact the sender immediately and permanently delete the original
and any copies of this email and any attachments thereto.
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This is such a great great question Holly. I have danced around the edges on this one too.
I had a debtor (sole prop) with a low inventory (seemingly low liability) business selling clothes at the weekend swap meet.
Inventory was less than 3K and the trustee did not want to wipe their nose with it.
However, I thought a 7 meant the business stopped, period.
Nice to see the discussion and I am grateful to see the list react.
>
> Do you ever file personal chapter 7s for people who want to keep their small
> business running?
>
> I have had a couple cases where I filed personal Chapter 7s for sole
> proprietors where I did not run into any problems with a Chapter 7 trustee.
> One of the debtors was a caterer, another one was a hair stylist. The
> assets in each were all exempted and the debtors received a discharge
> without any interruption to their businesses.
>
> Does incorporating or forming an LLC really make much of a difference if the
> business is run by only one person? I assume if the trustee was interested
> then he could just vote the shares to liquidate so incorporating would not
> really offer the debtor any real protection.
>
> I guess my question is: when is it really NOT a good idea to file such
> cases? It was brought to my attention that technically the debtor doesn't
> even have authority to continue with the business in a Chapter 7 (if it's a
> sole proprietorship) and any income generated from the business is an asset
> of the estate. While this may be true, practically speaking, it has not
> been an issue in any of my cases since the debtors did not make that much
> money and there were no real assets to liquidate.
>
> For those who have been around a while, what is your take on this? Do you
> always file Chapter 13s for people who want to keep their small businesses
> running? Is there any benefit to having the debtor incorporate the business
> before you file a Chapter 7? What horrible thing (other than liquidation,
> shut down, and a malpractice suit) am I not seeing here?
>
> --
> Holly Roark
> holly@...
> www.roarklawoffices.com
> Central District of California
> Consumer Bankruptcy Attorney
>
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