When your business is suffering financial problems, it can be a significant stress on your personal life. There are many questions to ask and decisions to make: should you continue working? Should you invest personal income into your business? Have you done everything you possibly can to make your business successful?
Sometimes, you’ve done all you can, and your business is still losing money. If that’s the case, it may be time to declare your business insolvent, which can benefit both you and your company. However, there can be cons to insolvency as well. It’s important to consider all angles when deciding whether or not insolvency is best for your business.
The Insolvency Exception
If your total debt is higher than your total assets, your business is insolvent. While this may seem like an entirely negative situation, it does have benefits. The insolvency exception is one of those benefits.
Most canceled debt has to be reported as income to the IRS. However, if your business is insolvent, your canceled debt does not count as taxable income to the extent you’re insolvent. So for example, if your business assets equal $500,000 and your business liabilities equal $600,000, you’re insolvent by $100,000. If you’ve maxed out a $20,000 credit card and the creditor cancels that debt, none of it needs to be reported as income because it is less than your total insolvent amount.
Insolvency Proceedings
In some cases, you can declare your business to be insolvent without proceeding immediately into bankruptcy, instead choosing to begin insolvency proceedings. These can include things like voluntary liquidation of your assets, renegotiation of payments with your creditors, and business debt restructuring. You may benefit from the lesser formality of insolvency to work personally with those you’re indebted to and settle on payment plans in your favor.
Choosing to handle these measures while in insolvency instead of declaring bankruptcy can help you avoid severe damage to both your personal and business credit. However, you’ll want to speak with a financial advisor to get professional input into your situation and decide if these proceedings are right for you. Sometimes, it’s better for a small business to declare bankruptcy; depending on the reason your company is insolvent, bankruptcy may position you to move forward, reorganize, and re-emerge with a profitable business plan that keeps your company going.
Losing Your Assets
If your business is declared insolvent and you choose to liquidate, even without officially declaring bankruptcy, you’ll likely lose the majority of your business assets. Your liquidator will sell assets to pay off creditors as much as possible and to cover their fee. While there are some ways to favorably position yourself so that you may be able to retain some assets, it’s important to remember that any financial decision you make will impact not only yourself but all your employees and customers as well. If you’re not prepared to be totally transparent about your business’s finances, and sometimes your personal financial choices as well, the liquidation process can feel stressful and invasive.
