The simple answer is yes, you can file bankruptcy if you own a business. I'm not referencing a business that is failing that needs to file bankruptcy - that would be a Chapter 7 or Chapter 11. Instead I'm referencing someone who needs to file bankruptcy, either Chapter 7 Liquidation or Chapter 13 Reorganization, but they own a business; the debtor owns either an LLC or Corporation, either 100% or jointly with other owners.
When considering bankruptcy, debtors need to consider the value of any assets that they own. Accordingly, the value of the business will be an asset of the bankruptcy estate. In most cases, the trustee will NOT take over and run the business, but the value of the owner's membership interests or stock certificates will be an asset, just like the value of real estate, cars, personal property, intellectual property, etc.
Companies will typically fall into one of three categories:
- Debtor owns the business 100% and it is profitable
- Debtor owns the business 100% but it is a small business, so if the debtor stops doing that type of work, the business fails
- Debtor owns some fraction of an LLC or Corp that was set up as an estate planning tool for another family member.
If the debtor owns the business 100% and it is profitable, the trustee may value the business based on its balance sheet, based on annual income (multiplied by some factor like 1.5, one-and-a-half times sales, for example), based on the value of the assets owned by the company, or based on the value of the company if it were to be sold to a third party. In these types of cases, bankruptcy may be a bad idea.
If the debtor owns a small business, the debtor may argue "if I quit, the business dies, therefore the business is worth nothing." That might be true from a practical perspective, but here in Tampa our Judges and Trustees have ruled that businesses are worth something, even if a nominal amount. In these types of situations, we look at factors like the value of the assets of the business, or the value of the company if it were to be sold. I once had a client who owned a hair salon. If she stopped cutting hair the business would close, so we valued the company at a few thousand dollars. Unfortunately, the debtor testified to the trustee that if someone offered to buy the salon, the lowest she would accept was $20,000, and so the trustee used that number as the company's value.
Finally, we have a situation where the debtor owns some small percentage of a company or partnership that was set up for estate planning purposes. We have had a few clients that own less than 1% of a family partnership, LLC or company, and they receive a few thousand dollars annually. Unfortunately, the right to receive that stream of income, the fraction of ownership, is also an asset of the bankruptcy case. In situations like that, we have negotiated a lump sum payment to the trustee, factoring amortization and the time value of money, to make an offer to the trustee to retain that fraction of a percentage of ownership.
If we really wanted to fight the trustee's valuation of the business, we do have referral partners who are certified business valuation experts, we have CPA referral partners, Business Broker referral partners and others with experience valuing businesses, but their services might be cost prohibitive to the person considering filing bankruptcy. Thus, these are all issues that should be explored before filing bankruptcy, and analyzed based on the specific facts of the situation, as well as whatever state laws, federal laws, and exemptions that might apply.
For more information on bankruptcy or business valuation, please subscribe to the Yesner Law Podcast, on iTunes and Stitcher. If you prefer, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at email@example.com.
Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.