Selling Can Be Simpler Than Liquidating
Selling your business as a whole also gives you more options for dealing with business debts. If the buyer has money, you can get a lump sum to pay off all business debts. Alternatively, the buyer might want to pay less but assume some or all debts of the business.
To obtain the money owed, you should first send a certified letter to the company stating you are owed this and providing the agreement that supports what you are owed and why. You can draft this yourself or have an attorney draft it for you.
Small business owners may find business bankruptcy an option for restructuring debt, liquidation, or to officially wind down a business with bills that can't be paid back. Some types of bankruptcy (Chapter 11 or Chapter 13) may allow the business to continue to operate while making smaller payments.
In California, buyers can be liable for the seller's unpaid taxes if they don't receive a Certificate of Payment from the CDTFA. You can end up being liable for taxes owed from $500 to the purchase price of the business.
Most states require that you first pay creditors, including any LLC members who are creditors. It's particularly important that you pay all taxes owed. Owing taxes can prevent you from dissolving your LLC. After paying creditors, your distribution order will depend on your state's laws or your operating agreement.
In most cases the IRS cannot collect on an individual member's unpaid taxes by seizing LLC assets. In the eyes of the law, an LLC is a separate entity from its owners (members). This distinction is what protects the members of an LLC from lawsuits or liens against the LLC.
Understanding an LLC's limited liability protection
This separation provides what is called limited liability protection. As a general rule, if the LLC can't pay its debts, the LLC's creditors can go after the LLC's bank account and other assets.
Your Lender Will Initiate Collections
Once the loan default grace period is up, your lender will hand over your account to collectors. It's at this point that lenders will usually be unwilling to work with you and will start seizing your business assets. If you pledged personal assets, those may be at risk as well.
By running your business as a corporation instead of a sole proprietorship, you generally protect yourself from personal liability for the business's actions or debts. In essence, the corporate veil ensures that the business and its owner are treated as distinct legal entities.
Business debt may be written off when it becomes clear that the debt cannot be repaid, but there are some painful steps that happen in the meantime. Lenders will try to collect, and if they can't, will often turn the debt over to collections. Debt collection agencies can be very persistent in their efforts to collect.
Conclusion: Going to small claims court may be worth it for $500, but it will determine how you weigh your costs versus benefits. At a minimum, it is worth it to send a demand letter.
Most of the time, businesses are able to work with their customers to ensure that the payment is collected, even if it comes in late. But in situations where other efforts to collect unpaid invoices fail, you may be left with no choice but to send your client to collections.
A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. You can deduct it on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return.
Your creditors can transfer and sell your debt to a collection agency without your permission. However, the collection agency must contact you about the sale before attempting to collect the debt.
One common way is to use the enterprise value (EV) approach, which measures the value of the company as a whole, regardless of how it is financed. EV is calculated by adding the market value of equity and the net debt (total debt minus cash) of the company.
Borrowers can apply once they've used all the loan proceeds they're requesting forgiveness for. Borrowers can apply for forgiveness any time up to five years from the date that SBA issued the SBA loan number.
First, talk to your lender about your options. You might be able to refinance the loan and get a lower interest rate, or a longer loan term. If your lender can't help, consider raising money from investors or selling some of your business assets to come up with the cash you need to pay it off.
If you are a sole proprietor and your business goes under, you are personally liable for its losses. As a sole proprietor, your house, car, and other personal possessions could be seized to pay for the debts your company has incurred.
Your LLC's books must be settled—meaning all debts and taxes owed must be paid, and all remaining assets must be distributed—before you can file the articles of termination.
General Rule: LLC Isn't Liable for Members' Personal Debts
Like corporations, the money or property held by an LLC belongs to the LLC, not the members individually. As a result, the LLC's property can't be taken by creditors to pay a member's debts.
The general rule is that members of an LLC enjoy limited liability and cannot be sued personally for activities or debts of the LLC. In other words, the “corporate veil” of the LLC legal structure protects its members from personal liability.
On the other hand, pass-through entities, such as LLCs and S corporations, don't pay taxes at the business level, so they wouldn't receive a refund for business taxes. However, they may be eligible for other tax refunds, such as payroll taxes, sales tax, or excise tax, depending on their situation.
Fear not, the IRS recognizes your LLC as a living, breathing entity regardless of the amount of activity, gains or losses it experiences. It's absolutely acceptable for your company to ebb and flow through trepidation, solid footing and full- fledged confidence, then back to trepidation on a quarterly or annual basis.
As an LLC, you want to be careful to try not to report losses for more than two years. Otherwise, the IRS may decide to classify your business as a hobby rather than an actual business. If this happens, you can't deduct your business expenses for tax purposes.