In Chapter 13 - Want to start new business (already earning money)

[chicagoed195]

If it were me, I might consider setting up a single member LLC and making an election to be taxed as an S-Corporation. Then, however difficult it might be to show some constraint, I would avoid making any distributions of earnings until your Chapter 13 is completed.

You should discuss this with your attorney, but I think it would work.

[justbroke]

If it were me, I might consider setting up a single member LLC and making an election to be taxed as an S-Corporation. Then, however difficult it might be to show some constraint, I would avoid making any distributions of earnings until your Chapter 13 is completed.

You should discuss this with your attorney, but I think it would work.

Deferring income would be a run-around the Trustee and the bankruptcy estate, and I would hope any "bankruptcy" attorney would say... no-go. Even with my misgivings, it would probably work if there is no reporting requirement (to the Trustee). But, I highly suspect that this runs contrary to 11 USC 541 and would be contrary to law.

As suggested, please contact a skilled and seasoned bankruptcy and asset protection attorney specializing in business and deferred compensation plans. The bankruptcy code specifically talks about such plans in 11 USC 541.

[chicagoed195]

Interesting point which is why I suggested discussing it with the attorney. I guess if the primary purpose is to hide income, then the courts might be able to pierce the corporate veil. If however, the primary purpose is to grow the business, attract potential investors and acquire the legal liability protection afforded by a corporate form of organization, I think the bar would be too high or the courts to overcome.

Having said that, I still think it is a viable plan. The debtor is simply trading one asset (the websites) in exchange for the common stock of the corporation (or member interest in the LLC). Once this is done, the income stream from the transferred websites and any future websites is not the income stream of the debtor, but the income stream of the corporation. The corporation is then the legal entity that has the right to determine whether profits are paid out in salary and/or dividends or reinvested in the operations of the business.

Even if there is some uncertainty about the existing websites, there should be no reservations about additional websites that the op is talking about creating. Setting those up from the getgo in a form of organization that has legal liability protection is smart business and would only create disposable income if the corporate entity paid it out in some form to the member/shareholder.

[justbroke]

There is a distinct difference between deferred compensation and re-investment. That is why deferred compensation is specifically listed as property of the Estate in 11 USC 541.

[LadyInTheRed]

Interesting point which is why I suggested discussing it with the attorney. I guess if the primary purpose is to hide income, then the courts might be able to pierce the corporate veil. If however, the primary purpose is to grow the business, attract potential investors and acquire the legal liability protection afforded by a corporate form of organization, I think the bar would be too high or the courts to overcome.

Having said that, I still think it is a viable plan. The debtor is simply trading one asset (the websites) in exchange for the common stock of the corporation (or member interest in the LLC). Once this is done, the income stream from the transferred websites and any future websites is not the income stream of the debtor, but the income stream of the corporation. The corporation is then the legal entity that has the right to determine whether profits are paid out in salary and/or dividends or reinvested in the operations of the business.

All of a Chap 13 debtor's income must be devoted to the plan. The debtor can't simply transfer an income producing asset to a coporation to keep the income that the asset produces from the trustee. If the transfer is not permited by the BK Code or the court, the trustee doesn't have to pierce the corporate veil. He simply has to avoid the transfer under 11 USC 549.

[coopersmydog]

Man time flies... I've discussed with my attorney and he's basically said the same thing as most of the posters here. Run your business, complete your P&L at the end of the year, do your taxes and we'll submit any necessary changes. He said if I felt setting an LLC was best for me, feel free. So now I'm in the process of getting a good accountant and trying to find a lawyer to help structure the business in the most beneficial way.