Sole prop to LLC

[GWBcasualty]

That is not how it works in Bankruptcy.

Your invoices are meaningless for a bankruptcy valuation. Unless those invoices are somehow secured to the property (not likely), they have no bearing. Surprisingly, BK takes a rather direct approach on this issue. The value of a company is the liquidation value of its hard assets and outstanding receivables. The only accounts payable that matter are secured creditors, if there are no secured creditors, then there is no offset for valuation.

Thanks.
So if I do #3 nobody should care since the invoices are meaningless?

If I go with #1 (which is likely) I still have to list the invoice on my list of debts even if unsecured?

[HHM]

That is not how it works in Bankruptcy.

Your invoices are meaningless for a bankruptcy valuation. Unless those invoices are somehow secured to the property (not likely), they have no bearing. Surprisingly, BK takes a rather direct approach on this issue. The value of a company is the liquidation value of its hard assets and outstanding receivables. The only accounts payable that matter are secured creditors, if there are no secured creditors, then there is no offset for valuation.

[GWBcasualty]

As #3, I am not sure what you mean by the invoices reducing the value of assets. It doesn't work that way in BK. The value of the business is its "liquidation" value (i.e. what you could sell your assets for) minus "secured debt".

Yes. #1 is definitely easier, but let me try to explain what I mean... when a LLC is formed you can "sell" assets from a sole prop to a LLC.

Contribution of Assets

If a sole proprietor contributes assets to a single-member LLC (SMLLC) taxed as a disregarded entity, no transaction occurs for tax purposes, as he or she is deemed to continue holding the assets as a sole proprietor. However, for state law purposes, the LLC holds title to the business's assets after the conversion.

Let's just assume for simplicity that my inventory has a liquidation value of $10K and that I have outstanding invoices of $10k with vendors. If I form an LLC and my contribution to the LLC are the inventory and the liabilities, I could value the inventory at cost (say $15K) and when I list as an exemption my interest in the xyz LLC, I would list $5k (asset - accounts payable).

The only advantage over #1 is that my vendors wouldn't have to know about the BK filing.

Sorry if it's unclear.

[HHM]

As #3, I am not sure what you mean by the invoices reducing the value of assets. It doesn't work that way in BK. The value of the business is its "liquidation" value (i.e. what you could sell your assets for) minus "secured debt".

#3 seems awfully complex for what you need to accomplish. StartingOver is correct, you cannot simply "assign" debt and "transfer" assets. The lenders on the debt would need to agree, and the company has to "buy" the assets. Otherwise, guess what, that is an avoidable transfer in BK and the exemption becomes moot.

For your BK, simply do number 1, then after the BK, if evaluate if their are any tax advantages to operating as an LLC, if yes, then form one, if not, don't bother.

[StartingOver08]

How would you do that? I only ask because in the normal course of business a new LLC begins from the inception date of the corp. How would you "assign" debt to an entity that was incurred prior to the existence of the entity unless the entity "purchased" the assets and the debt?

[GWBcasualty]

In #3, are you transferring "new" debt to be incurred after you form the LLC or are you trying to transfer existing debt that you now owe as a sole proprietor?

Existing debt and existing assets.

[StartingOver08]

In #3, are you transferring "new" debt to be incurred after you form the LLC or are you trying to transfer existing debt that you now owe as a sole proprietor?

[GWBcasualty]

OK. Just to briefly recap, I can fully exempt everything I own including the inventory of my biz.

However, I am still planning my BK when it comes to ensure continuing operations of my biz, relationship with my vendors and protecting myself from any future debt.

1) I can file, exempt the inventory, discharge all my debts. List the debts with vendors (invoices - no liens or formalities... long standing relationships). Reassure the vendors that I intend to honor my debt with them and continue operating.
The downside of that is that any future debt with vendors could not be discharged in BK.

2) Same as above, but form a LLC after/during BK and have all future biz activity be under the LLC umbrella.

3) Form a LLC now. Transfer to the LLC assets AND debts. File afterward, that way my vendors wouldn't even know I filed.... (they have no SSN or anything, again very informal relationship)... I could exempt my interest in the LLC under CA System 2 with even greater ease because the outstanding invoices would reduce the value of the assets and if the economy worsen I could just shut down the LLC.

I know #1 and #2 are feasible and I have nothing to hide/explain to the trustee... how about #3 which would be my favorite? Is there anything in the law that forbids the transfer of debt from an individual to a LLC??