Sole prop to LLC

[frogger]

Smart decision.

[GWBcasualty]

If you have a good relationship with the vendors now, you should not have a problem with them in the future. The one key factor to that is to make sure that they are paid.

Perhaps you need to make sure these vendors are paid, and then have them put you on a c.o.d. basis until after you file bk. By doing that, you should be able to preserve your relationship with them, and you can not be accused of making a preferential payment to them, because you're paying cash on delivery.

As to setting up a new corporation at this time, I would not, unless there was going to be a substantial amount of time between the setting up of the corp and the filing for bk. Setting up a new corporation could give the "appearance" of you trying to hide something.

I finally decided against it. Although it would have some benefits and I don't have anything to hide, I just think it would raise too many red flags and may get my petition under extra-scrutiny and... who needs that, really!

[frogger]

Again I am exploring ways to continue a relationship with some vendors, without actually reaffirming the debt.

Thanks

If you have a good relationship with the vendors now, you should not have a problem with them in the future. The one key factor to that is to make sure that they are paid.

Perhaps you need to make sure these vendors are paid, and then have them put you on a c.o.d. basis until after you file bk. By doing that, you should be able to preserve your relationship with them, and you can not be accused of making a preferential payment to them, because you're paying cash on delivery.

As to setting up a new corporation at this time, I would not, unless there was going to be a substantial amount of time between the setting up of the corp and the filing for bk. Setting up a new corporation could give the "appearance" of you trying to hide something.

[GWBcasualty]

Not quite sure what you are asking?

Assuming that I am forming a LLC or a Corp. - This corp would take over the assets and liabilities of my sole prop... I would then exempt the value of my interest on the Corp.

I guess the question is: "Would the new LLC or Corp be obligated to assume ALL the liabilities or just some of them?"

Again I am exploring ways to continue a relationship with some vendors, without actually reaffirming the debt.

Thanks

[HHM]

Not quite sure what you are asking?

[GWBcasualty]

Without the consent of the creditor, you cannot 'assign' debt and take away responsibility of the person whom originally owed the debt.

You could create an LLC, enter into an asset purchase agreement with the LLC such that the purchase price is the amount of the liability you owe for business operations, thus the LLC would assume your personal liability (with the consent of the creditor) and in exchange the LLC would get all of the receivables and assets in addition to the liabilities. The purchase price would be the liabilities it assumes.

--William

But the LLC (or the Corp.) can pick which assets and/or liabilities to take over, right?

[BKDefender]

Without the consent of the creditor, you cannot 'assign' debt and take away responsibility of the person whom originally owed the debt.

As for winding down operations of an LLC, I can tell you that in Nevada, all secured AND unsecured creditors of the LLC must be paid before any excess proceeds can be disbursed unless it is the LLC itself filing bankruptcy (it CAN file, it just can't get a discharge, so it uses the BK court to liquidate & distribute then it would get dissolved.) The value of the LLC is the value that remains after the LLC pays all of its debts, secured & unsecured.

Because a lot of laws in Nevada are a bit similar to those in California, California may be similar in it's dissolution process.

Nevada's dissolution process is detailed in NRS 86.505, 86.531, & 86.541 available in http://www.leg.state.nv.us/NRS/NRS-086.html .

You could create an LLC, enter into an asset purchase agreement with the LLC such that the purchase price is the amount of the liability you owe for business operations, thus the LLC would assume your personal liability (with the consent of the creditor) and in exchange the LLC would get all of the receivables and assets in addition to the liabilities. The purchase price would be the liabilities it assumes.
But before you do it, you'd need to get an accountant to do a valuation of the assets and liabilities to come up with a dollar amount that the company (presently a sole proprietorship) is worth so it can be 'sold' to the LLC for assumption of liabilities. It must include a net-present-value determination of the receivables and liabilities.

Again, this is how I would structure something like this in Nevada - I have no idea if this would work in California.

--William

[HHM]

What if a combo of secured and unsecured debt, and the real property has equity in it with the secured debt, but then the entity also owed unsecured debt in addition, and the net total of equity is still less negative number, so zero share value. Can/will the T'ee strip the RE out of the LLC, or liquidate it to pay a portion of the unsecured creditors, after the secured is fully paid?

So the question is, how is the secured and unsecured debt handled inside of an entity when the net equity is zero, net share value zero?

Unsecured debt does not matter. If no entity or person has a perfected security interest in the assets (directly), then the trustee can do what ever he wants with it. So, in the above scenario, if there is actually equity above and beyond the claims of the secured creditor, the trustee may liquidate to get at that equity.

[Mensa1]

Basically correct, a business entity would have zero value if the amount of the secured claims against the business assets exceeds the value of the asset.

For example, many real estate investors will hold real property in an LLC. However, if the mortgage on the property (probably in the name of the individual, not the LLC) exceeds the value of the property, the LLC is worth Zero. Hence, there is nothing for the trustee to do.

What if a combo of secured and unsecured debt, and the real property has equity in it with the secured debt, but then the entity also owed unsecured debt in addition, and the net total of equity is still less negative number, so zero share value. Can/will the T'ee strip the RE out of the LLC, or liquidate it to pay a portion of the unsecured creditors, after the secured is fully paid?

So the question is, how is the secured and unsecured debt handled inside of an entity when the net equity is zero, net share value zero?

[HHM]

On a little different bent here, with regard to closely held Corps and LLC's, doesn't the T'ee look at net share value only. As in the case of an entity that owns property or any other commodity that is encumbered, (combo of secured and unsecurted debt), and the encumbrance from a 3rd party comm'l lender is equal to or greater than the market value of the property or assets, hence 0 share value. Doesn't the T'ee then avoid dealing with the entity in total?

I realize that the OP is contemplating forming an entity now which may be a recent transfer situation, but the above relates to entities that have existed for years. Appreciate any thoughts on that, especially HHM.

Basically correct, a business entity would have zero value if the amount of the secured claims against the business assets exceeds the value of the asset.

For example, many real estate investors will hold real property in an LLC. However, if the mortgage on the property (probably in the name of the individual, not the LLC) exceeds the value of the property, the LLC is worth Zero. Hence, there is nothing for the trustee to do.

[Mensa1]

On a little different bent here, with regard to closely held Corps and LLC's, doesn't the T'ee look at net share value only. As in the case of an entity that owns property or any other commodity that is encumbered, (combo of secured and unsecurted debt), and the encumbrance from a 3rd party comm'l lender is equal to or greater than the market value of the property or assets, hence 0 share value. Doesn't the T'ee then avoid dealing with the entity in total?

I realize that the OP is contemplating forming an entity now which may be a recent transfer situation, but the above relates to entities that have existed for years. Appreciate any thoughts on that, especially HHM.

[HHM]

Exactly, I can't really speak to the particulars of that exemption. I understand exempting the "Value" of the shares or ownership; but if I were on the other side, I would argue that the exemption only protects the shares from being sold by the trustee to a 3rd party (that is the value), but the "rights" associated with the shares or ownership are still part of the BK estate and can allow the trustee to exercise control over the business and liquidate it.

But, if it has worked for others, then it will probably work for you.

However, I think you still have the issue with assigning the debt to the LLC. Just because "you" assign it to the LLC does not extinguish your personal liability. You would still need to list the invoices in your BK. (unless the vendors were willing to agree to the assignment and release your personal liability).

[GWBcasualty]

According to closed cases that I studied on Pacer it would be exempted using the WC under "Stocks and Interests in Business". In one filing they formed two INCs a few months before filing and exempted them.... is a small corporation treated differently than a LLC??

I agree that going that route offers the only benefit of not listing the vendors and could raise some flags... not having anything to hide that would only mean a longer process and added stress and, no, I am not set in going that route. Just want to make sure I know everything involved and make sure I am not breaking any law or BK rule.

I appreciate your input.

[HHM]

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?

Actually, that is not what I said, if you do #3, the invoices don't matter in that they do not offset the value of the inventory and assets, and the trustee can go after the assets. If the inventory and assets are worth $25,000, you could have $500,000 in outstanding invoices and the liquidation value of the LLC is still $25,000. The only unknown for me is how CA exemption scheme 2 would apply in this situation. But, if the exemption works like in most states, you will actually lose the exemption on the "stuff" in the LLC because you (the debtor) no longer have legal title. The trustee can still step into your shows as owner of the LLC, and sell the assets. I think you run a huge risk that the trustee simply shuts you down if you go option 3.

[Mensa1]

#3 might accomplish your goal. Not having to list your Vendors.

Other than that it does nothing for you, in fact due to late transfer it may complicate things due to the T'ee having a harder look at everything. Just my opinion.

Seems as though you are set on doing #3 so have at it. GL, let us know how it works out. Maybe you luck out and draw a busy T'ee who sees little to no upside compared to the time invested to unearth the pound of flesh.