Tips for Financially Troubled Businesses
If your company is facing financial difficulties, read these tips to keep out of trouble with the IRS, bankruptcy courts, and your bank.
1. Keep taxes current. Rule Number One is to meticulously pay all payroll taxes on time, especially those withheld from employees’ paychecks. Even if your business is a corporation or LLC, the IRS and state tax authorities can hold you personally liable for these taxes -- and assess penalties. And business bankruptcy won't get you off the hook personally for these debts.
2. Stave off cash flow problems. When you realize you don’t have enough revenue to pay the bills, slow your “burn rate” by cutting expenses to the bone. Then prepare a short-term cash projection and plan for your immediate needs. Make a list of monies owed to you, and collect as much as possible. Pay necessary items like taxes and overhead costs, but delay paying other bills by working with suppliers and other creditors.
3. Don’t lie about debts. Struggling business owners may frantically try to borrow more money. But if you apply for a new loan or to consolidate old ones, be forthright in disclosing the financial condition of your business. Otherwise, the law may regard your new debt as having been obtained by fraud, thus making you personally liable (even if you file for bankruptcy). The debt could haunt you for years.
4. Be careful about transferring business property. Sometimes, out of desperation, a business owner will try to protect personal assets by hiding them or giving them to friends and relatives. Since creditors are used to ferreting out such hidden assets, these tactics tend to be ineffective and give rise to civil and even criminal charges of fraud.
5. Avoid preferential payments to creditors. The Bankruptcy Code frowns on your paying some creditors and not others; that is, "making preferential payments.” If you file for bankruptcy, all payments you make during the year before the filing will be scrutinized by creditors to make sure that some creditors weren’t given an unfair advantage. Outside of bankruptcy, if you owe money to creditors who hold collateral, the creditors have special rights in the property that is the security for the debt, but you may legally pay one unsecured creditor ahead of the others.
6. Protect your bank account. If you owe money to a bank, it’s often wise to keep most of your checking and other accounts elsewhere. This is because your loan agreement may give the bank the right to take your funds without prior notice if the bank thinks you’re in financial trouble. (This is called a "setoff.") It can be a rude surprise to learn that your lender has drained your checking account.
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