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Most small business owners start out with big dreams, but often, those dreams don't work out. According to Bureau of Labor Statistics data, 25% of small businesses fail during the first year, 45% during the first two years, and 65% during the first 10 years; only a quarter of small businesses make it 15 years or more. If you're a small business owner in this situation, you aren't alone, and you can get help to move forward.
Business liquidation is an important step in the process of closing down a business. Liquidation can be surprisingly complex, and getting good legal advice can help you move forward in an efficient and financially advantageous manner.
What is business liquidation?
Liquidation is the process of selling off the assets of a business. It's distinct from dissolution, which is the process of eliminating the business entity itself.
Some of the assets that may be sold in liquidation include:
- Equipment
- Furniture
- Unsold inventory
- Vehicles
- Real property
Liquidation is one part of closing down a business. The business ceases normal operations and focuses all of its remaining efforts on converting assets into cash, usually to pay creditors.
Who receives the proceeds from a liquidation sale?
Often, a business is liquidated when it is insolvent, meaning it can no longer meet its financial obligations. As such, liquidated assets are usually sold to pay creditors. Holders of secured debt (that is, debt with collateral, like a mortgage or auto loan) have the highest priority, followed by holders of unsecured debt (such as credit cards).
If the business has shareholders, then they may be entitled to any leftover funds after the creditors are paid. Anything that still remains goes to the business owner.
How Chapter 7 bankruptcy interacts with business liquidation
Businesses can take advantage of Chapter 7 bankruptcy to streamline the liquidation process. In Chapter 7 proceedings, the bankruptcy trustee will sell the business assets and use the proceeds to pay creditors. However, there are important differences in how Chapter 7 works, depending on the type of business:
- If the business is a sole proprietorship, then there is no distinction between the business and the business owner as legal entities. The owner can file for Chapter 7 bankruptcy in order to discharge both business and personal debts.
- If the business is a partnership, LLC, or corporation, then the business is a separate entity from the owner. Business entities can still file for Chapter 7, but they cannot get their debts discharged, and the owner or owners may end up liable for those debts. The only real benefit of Chapter 7 in this situation is that the bankruptcy trustee manages the liquidation process.
As always, just because you can file bankruptcy doesn't mean you should. Only an experienced attorney who knows the bankruptcy laws and the courts can advise whether it's in your interest in your individual situation.
Why you need a lawyer for small business liquidation
Liquidation is an important step to close down your business and move forward with your career. It's also a fairly complex process where an error can expose you to significant financial and legal liability. An attorney can help you move forward by:
- Investigating and organizing your assets so you know when and how to sell them
- Handling communications with your creditors on your behalf
- Reviewing sales agreements, contracts, and other legal documents for accuracy and compliance
- Advising whether Chapter 7 bankruptcy is in your interest
If you are taking the difficult step of liquidating your business, you surely have a lot on your mind. Our experienced attorneys can guide you forward. Contact us today to speak with an experienced small business liquidation lawyer at Benjamin R. Matthews and Associates, LLC.