Forum Rules (Everyone Must Read!!!) (updated: 04/28/2015)

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S Corp Filing and Client Issues

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  • S Corp Filing and Client Issues

    Hi All!

    I have a situation that I am trying to keep my head above water with my clients.
    I have a company that is 1 year old that provides clients an application processing service. I have had a string of bad employees (salesmen) that had mislead our clients in order to sell them our service. Unfortunately these situations that has caused us some issues, was found out after the fact. Then I had staff that was over paid to do the processing of the applications and had been falsifying progress reports to me. Then about 4 weeks ago, my processing staff had left the company once I had addressed and uncovered that they had not been doing their jobs as they been reporting to me. I blame myself for what happened, I was the sole owner running the company and trying to do everything. It was my choice of employees that got me into this mess, my lack of experience and the people I trusted.

    I am quickly running out of money, about 1 month left of salaries (6 employees)and we are no longer taking clients but I have about 55 clients of those 10 are getting increasingly angry that they are not getting the service they paid us to do. Some of the clients are threatening to sue for breach of contract, and I am stuck because the remaining staff does not know how to do the processing service. I have been told that since I do not have the staff to do this complicated job of processing and funds are running out that I should close the company and file a BK.

    I also have a separate company (LLC) I formed at the beginning of the year (totally separate industry)that was being funded from the money the other company was making.This company is just starting to move forward now but not making any money and I am afraid that I will lose everything (both companies) if I do a BK on the processing company.

    Please help with a few questions. What is the time frame one should look at to file with this situation? The S Corp does not own anything, has no credit debt and has some cash but not much. What if I am sued for not performing the services I mentioned, would it be wise to expedite the filing? Which would be the best avenue? what type of BK?

    I have a moral issue with this whole situation, I went at this with the best of intentions, I didnt even pay my self a salary the first year! This situation is really beating me up mentally. I would like to wait to see if I can pull this situation out of the dumpster but I am afraid I may go down trying and I obviously do not want to be on the street trying to fix this issue.

    Thank you for taking the time reading this lengthy post, my writing is not the best.
    I do not know what to do and would appreciate some suggestions.

  • #2
    "55 clients of those 10 are getting increasingly angry that they are not getting the service they paid us to do." Can't you personally do the processing for these 10 clients and make them happy until the contract runs out? What are the contract terms? Is there a way to cancel the contract? Do you have insurance that covers errors and omissions?

    "This company is just starting to move forward now but not making any money and I am afraid that I will lose everything (both companies) if I do a BK on the processing company." You won't BK the sCorp or the LLC. You BK yourself. Then your interest in the companies becomes property of the BK estate. If this company has no assets the Trustee is not going to be interested in it. You don't lose a LLC because you filed personal bankruptcy. You lose a LLC because you are the only member, the company has assets that can be liquidated and the assets exceed the liabilities. In that case the Trustee steps in as you and takes control (sells the assets and pays off the liabilities.)

    My philosophy is not to file unless I have no other option. You are separate from your S-Corp. Are these clients going to sue you personally? If it was me, I wouldn't file unless the clients sued me personally, breached the corporate veil and received a judgment. And even then, not unless I had wages that could be garnished. I'd do everything in my power to appease those angry customers of the S-Corp to prevent all of this from happening.

    If no one has filed suit against you yet, you have at least six months, probably a year or more if you can wind your way through litigation and put up a defense. Use this time to plan wisely.


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