Do you ever file personal chapter 7s for people who want to keep their small business running?
Posted: Tue Aug 17, 2010 10:43 pm
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
Sent from my iPhone
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.
The post was migrated from Yahoo.