When starting up a company, your advisers will tell you to legally separate your personal finances from the company finances. This separation is one of the most important benefits of early incorporation. Separating yourself from the company legally will protect your personal finances just in case things in the company do not work out as expected.
Simply put, in the case that your company is declared bankrupt, there will be no need to worry that the judge will confiscate your personal assets to cover the company’s debt.
Everyone thinks of the profits they will be making after starting a business with their awesome products and services and not things like bankruptcy. If you want to protect yourself from legal issues, then it is important to understand how bankruptcy works from a business point of view. But how does bankruptcy work? The following are some of the basics that you need to know.
Bankruptcy should be a last resort
This applies to both your finances and the company finances. Should your company land in murky waters and find yourself unable to pay your suppliers or clear the debts, it is important to try everything possible to resolve the debts before declaring bankrupt. It doesn’t matter what you do, whether you will have to close a few branches and cut down on the number of your staff, it is important to try and keep your company afloat. It might sound harsh but this is the reality of the business world.
How does bankruptcy work with Chapter 11?
Technically, there is no type of bankruptcy that can be termed good, but Chapter 11 is one of the best options. Under the watchful eye of an appointed trustee by the court, chapter 11 allows your company to remain open and offers you room for restructuring your business to run better and get more profits. So, if you think your business has a chance of reconstruction and rebuilding, then Chapter 11 is the best option.
However, if there is no hope for recovery, it is better to apply for Chapter 7. Chapter 7 liquidates all company assets and uses the money gotten from liquidation to clear as many debts as possible. This is applicable to both personal and small business bankruptcy.
Paying yourself becomes tricky
When you separate yourself from your company finances, you automatically become an employee of the company. Instead of relying on profits as a way of repaying yourself, you earn a wage from the company’s account like a normal employee. When a company is declared bankrupt, recovering pay that you missed in an effort to save the company is tricky.
This is because court considers you as one of the creditors and it’s their mandate to decide what you get. Do not try to pay yourself before filing for bankruptcy as the court will have to check your company’s payments and if you are listed in the ledgers, then they will demand you give back what you were paid so it can be distributed as per the decision of the court. You might also find yourself entangled into some legal trouble. You better accept the court and allow the court to handle it.
Always hire help
Both corporate and small business bankruptcy are complicated, it is always good to hire a profession lawyer to help navigate your company’s bankruptcy.
Finally, bankruptcy is not the end for your entrepreneurship, even after filing for Chapter 7 you can always learn from your mistakes and start something new, though it might take time, you will eventually recover.
Sourced from: businessblogs
Photo: Thinkstock/galdzer
Posted on May 5, 2023