by Damon Duncan
Running your own business can have its ups and downs. As a bankruptcy lawyer I have clients come into my office all the time who have a business that has not performed as well as they had hoped or planned. In those initial slow stages they have obtained a great deal of personal debt to help get the business off the ground. However, although that business was slow to start it may be on the uptick and have a bright future. If that’s the case they want to know if they can keep their business and still file for personal bankruptcy. The answer to that question really depends on the financial health of the business.
The first thing to decide when looking into a personal bankruptcy when you own your own business is whether or not it is a smart financial decision to continue to run the business in its current form. To help make that determination it is important to look at two different types of documents. The first are monthly profit and loss statements and the second is a balance sheet.
The profit and loss statements are able to give us an idea of whether or not the business is actually making money each month. A profit and loss looks at the gross income of the business each month and then deducts out the different expenses that business has. The bottom line number is the net profit or loss of the business. If we are able to tell over a prolonged period of time that the business isn’t making any money and is, instead, losing a lot of money, it may be time to shut the business down.
The second important document to look at in determining whether a business should continue moving forward is a balance sheet. The balance sheet looks at the assets and liabilities of your business on a specific date. Assets would include things like your furniture, accounts receivables and inventory where your liabilities would include things such as credit card and personal loans as well as other accounts payable. When you subtract the liabilities from the assets you will know the true value of the business. This value, if a corporation, will also determine the value of the stock in the corporation.
One area to be careful on when looking at balance sheets is the “goodwill” valuation of the business. We see that clients too often will overvalue the “goodwill” of their business. They may have been directed to do this by an accountant but for bankruptcy purposes we want to get a true value of your business. If you recently started your business and don’t have a large brand name then there is probably little “goodwill” in your business.
So knowing how to properly get a value for your business you can better determine if you should continue to run the business or shut it down. If you choose to shut the business down then list any debts that you personally guaranteed in your personal bankruptcy so those debts can be wiped out when you receive a bankruptcy discharge.
On the other hand, if you choose to continue to run the business then you can still list down any debts that you personally guaranteed in the bankruptcy. However, you would need to look over the loan documents to ensure that does cause a default on any loans your business has in its name.
If your business does not have too much equity in it and it is not causing you to lose money each and every month then you can protect your business and continue to run it even if you file a personal bankruptcy. However, we always tell potential clients it is very important to fully discuss your options with a qualified bankruptcy attorney before making a final determination on whether to continue running a business or not.