Filing Bk with a C Corp Business

[huffydogg]

Ok, thanks!

[justbroke]

Will I run into any problems if after my soon to be ex-wife closes the business, my brother opens a new business at the same location? He would be taking over the lease and sell similar items, and the name of the business, telephone number, etc. would all be different.

That is typically not an issue, but if there are any assets of the prior business used in that "new" business, you'll need to deal with that.

[huffydogg]

up

[huffydogg]

You really need to at least talk to your BK attorney about all of this. Probably best to talk to a corporate attorney about potential successor liabilty regarding the corporation as you probably do have a community property interest in it. And, if you don't think you and your wife are going to reconcile, I'd consult a divorce attorney as well. Your wife probably has a community property interest in that lease and the deposit. The sooner you have a court order regarding division of property, the better.

[What is community property depends on whether it was acquired before or after marriage and whether it was acquired with community property or separate property assets]

Will I run into any problems if after my soon to be ex-wife closes the business, my brother opens a new business at the same location? He would be taking over the lease and sell similar items, and the name of the business, telephone number, etc. would all be different.

[LadyInTheRed]

I would use my own funds to start the business. I did my own taxes this year, and put myself as single, she claimed our children and put herself as head of household. We are living in separate homes, I am assuming that would be considered legally separated, but not sure?

No. You need to go to court to be legally separated. You probably should have filed your taxes as married filing separately.

I hold the lease on the storefront, and it is personal guaranteed. That is why I don't want to let go of the lease, it will affect my credit and I am almost done with my chapter 13. On top of that, I will loose the deposit, which is 18k.

You really need to at least talk to your BK attorney about all of this. Probably best to talk to a corporate attorney about potential successor liabilty regarding the corporation as you probably do have a community property interest in it. And, if you don't think you and your wife are going to reconcile, I'd consult a divorce attorney as well. Your wife probably has a community property interest in that lease and the deposit. The sooner you have a court order regarding division of property, the better.

[What is community property depends on whether it was acquired before or after marriage and whether it was acquired with community property or separate property assets]

[huffydogg]

Your status, as a married couple, may be a factor since California is a community property State. If your divorce is final, or you have a "legal" separation, that may be different. You should definitely seek a divorce and/or bankruptcy/asset protection attorney's advice. I don't live in a community property State so I don't know the affects of using, potentially, marital funds to start a business. Still seems too sticky to me, but I'm not the expert. If it were me, and speaking only as a business person, I would put distance between the marriage, community property, marital funds, or any other commingling.

Who holds the lease on the storefront? Is it the corp or a personal guarantee?

I would use my own funds to start the business. I did my own taxes this year, and put myself as single, she claimed our children and put herself as head of household. We are living in separate homes, I am assuming that would be considered legally separated, but not sure?

I hold the lease on the storefront, and it is personal guaranteed. That is why I don't want to let go of the lease, it will affect my credit and I am almost done with my chapter 13. On top of that, I will loose the deposit, which is 18k.

[justbroke]

Your status, as a married couple, may be a factor since California is a community property State. If your divorce is final, or you have a "legal" separation, that may be different. You should definitely seek a divorce and/or bankruptcy/asset protection attorney's advice. I don't live in a community property State so I don't know the affects of using, potentially, marital funds to start a business. Still seems too sticky to me, but I'm not the expert. If it were me, and speaking only as a business person, I would put distance between the marriage, community property, marital funds, or any other commingling.

Who holds the lease on the storefront? Is it the corp or a personal guarantee?

[huffydogg]

Things have changed since I began this post. My wife and I have separated because of this financial dilemma. She has decided to liquidate the business and dissolve at the end of this year. Since the lease of the storefront is still good for a few more years, I was thinking of starting my own business similar to hers. The business would be under my name, with a different name than hers, different Tax EIN #, different telephone number...... Will the trustee question my business if she were to file chapter 7?

[justbroke]

Yes, definitely pay the "trust fund" taxes first if you liquidate!

[despritfreya]

I also spoke to our CPA. . . and she said that it would be easy to dissolve the business. . . The business hasn't been making any money! We can sell the remaining assets in a closeout sale, and pay some of our suppliers.Is this possible???

I have no problem with this if done before you file bk AND you have no intention to go back into the same business using a similar name, the current phone number, customer lists and general “good will” of the current company. If you intend to go back into the business (either you or your wife) then you could be facing the successor liability problem. Now, since the company is losing money I am not sure why you would want to continue on in it so I will assume you will not open a new business.

Assuming there are no UCC1 liens on the assets of the business, the proceeds of the fire sale should be used to first pay any business related taxes (payroll, sales). You can continue to draw ordinary and normal salary, but you cannot raid the corporate coffers and you would try to distribute the remaining funds equally (on a pro rata basis) between other corporate creditors. Make sure all transactions are traceable through corporate bank accounts.

Des.

[huffydogg]

And what does the attorney suggest happen to $300,000 in merchandise? If she dissolves the corporation and gets the corporation's assets and then contributes them to a new corporation, I am pretty sure that the transfer to the new corporation is going to be a problem in her BK, even if she waits 6 months to file.

It sounds like the business debt was all incurred by your wife before she formed the corporation, while she was a sole proprietor. Did the corporation formally assume that debt? If not, the debt will be discharged in her BK. It doesn't sound like this is the corporation's debt. But, if the corporation has $300,000 in merchandise and no debt, the trustee very well may try to sell her stock in the corporation if she can't buy it back.

I also spoke to our CPA, and told her what the attorney told us to do, and she said that it would be easy to dissolve the business because of the large debt the business has, and because the business has been on the negative (Corp Income Taxes) the past 5 years.The business hasn't been making any money! We can sell the remaining assets in a closeout sale, and pay some of our suppliers.

Is this possible???

[despritfreya]

Lady is correct and, in my opinion, the most recent attny advice you got is not the greatest.

1. If the corporation has $300k in inventory/assets and no debt, the shares are worth $300k. Transferring the assets to a new entity in your wife’s name means you have devalued the shares of stock in anticipation of filing bk. You have, in essence, conveyed the value of the stock to someone without consideration. Trustee will set it aside as a “fraudulent conveyance”.

2. If the corporation has $300k in inventory and owes money to creditors, Transferring the assets of the corporation to a new entity without consideration may make the new entity liable for the debts of the old one based upon “successor liability”/ “alter ego” theories.

I think you need to talk to more attnys. Sounds like you will not be filing a Chapter 7.

Again, just my opinion.

Des.

[LadyInTheRed]

We saw another attorney, and he recommended that we close or dissolve the corporation, and reopen it under another name. He said to make sure not to reopen it under my wife's name, and that she could file in 6 months.

And what does the attorney suggest happen to $300,000 in merchandise? If she dissolves the corporation and gets the corporation's assets and then contributes them to a new corporation, I am pretty sure that the transfer to the new corporation is going to be a problem in her BK, even if she waits 6 months to file.

It sounds like the business debt was all incurred by your wife before she formed the corporation, while she was a sole proprietor. Did the corporation formally assume that debt? If not, the debt will be discharged in her BK. It doesn't sound like this is the corporation's debt. But, if the corporation has $300,000 in merchandise and no debt, the trustee very well may try to sell her stock in the corporation if she can't buy it back.

[huffydogg]

If the business is in such bad shape, would it not be wise to step back and re-assess the entire situation? Perhaps shutdown the business, file Chapter 7 personal bankruptcy, then receive your discharge. Then, after the dust settles, start a "new" business? I don't know. I had a similar issue and I did shutdown my business (S Corp). My business had debt and no assets.

We saw another attorney, and he recommended that we close or dissolve the corporation, and reopen it under another name. He said to make sure not to reopen it under my wife's name, and that she could file in 6 months.

[huffydogg]

The problem is that we have about $300,000 in merchandise, but sales are really slow, and it takes long to sell the merchandise.