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What Happens to My Company if It Makes No Money?

Making money for your business is, of course, the goal of any company; otherwise, why go into business at all? But many companies struggle in their first year or two of existence until their marketing efforts begin to pay off and customers come to appreciate their product or services. But what happens if your company makes no money? Can you still continue as a going concern?

Regarding your tax obligations, many entrepreneurs operate their businesses as an LLC, or limited liability company, which is essentially an entity that has the pass-through taxation characteristic of a partnership or sole proprietorship with the limited liability protection of a corporation. Should your LLC fail to make any money, you still need to file either IRS Form 1065 if taxed as a partnership or a Schedule C for single members. Your loss will appear as a deduction on your personal 1040 form. If you do not file, you are foregoing the deduction.

At some point, however, you cannot keep operating at a loss. Debts will accumulate, vendors will no longer deliver materials and you will face lawsuits and collection activities. Your options are to try to sell your business, liquidate and sell off any assets or consider bankruptcy.

There are different types of bankruptcy—Chapter 7, Chapter 11 and Chapter 13—depending on whether you are filing personally or for your business, the type of business and if you wish to liquidate it or continue operating. Regardless of which chapter you use, there is an automatic stay of all collection activities and lawsuits that goes into immediate effect upon filing. Certain assets are also exempt from possible seizure by the trustee.

Involuntary Bankruptcy

It is possible that you could be forced into involuntary bankruptcy under Chapter 7 or 11 by creditors but this is a rare occurrence unless creditors feel you are hiding assets, making fraudulent transfers in anticipation of bankruptcy or you are attempting to shield these assets from seizure. A single creditor can file an involuntary petition if you have less than 12 creditors, but at least 3 need to join in otherwise. The creditors need to show your company is not paying its debts as they become due and their own debts must be for a fixed amount and be indisputable.

Most creditors, however, do not want you to file but you may have little choice if marketing efforts are not producing or other facets of your enterprise are not promising you success any time soon and lawsuits are looming.

Chapter 13

If you are a sole proprietorship and you feel your company can become profitable in time, you might consider a Chapter 13 debt reorganization. In a Chapter 13, you list all your debts and creditors, assets and the applicable exemptions. You have to submit a reorganization plan, proposed in good faith or not for the purpose of fraud, for the bankruptcy trustee’s approval. The plan will set forth a monthly payment over a 3 or 5 year period to the trustee who oversees its distribution.

The length of the plan is dependent on whether your median income is above the state’s median income or not. If above the median, you will have to propose a 5-year plan. A “means” test determines what disposable income you have and sets that as your monthly payment. Payments are made on the basis of priority with unsecured creditors paid last.

If you are unable to make the payments, the trustee can modify the plan if you can show that some unforeseen event is impeding your current ability to make the original payments. The court can also grant you a hardship discharge whereby your debts are discharged. If not, your case will be converted to a Chapter 7 liquidation or you may ask the court to dismiss the proceeding. If dismissed, you will be obligated to pay those creditors whom you still owe including interest that was not paid while the plan was in effect. At the end of the 3 or 5 year period, any unsecured debts are discharged and your obligations to your other creditors under the plan are considered satisfied.

Chapter 11

For larger companies and corporations seeking bankruptcy protection, the cousin to a Chapter 13 is a Chapter 11. It is much more complicated proceeding but is designed to give relief to struggling businesses while they go through a restructuring. Smaller businesses may also file under Chapter 11 and are treated differently with less cost involved and less complexity.

Under Chapter 11, the corporation as debtor-in-possession operates as a trustee. This enables the corporation’s directors to negotiate new contracts or leases and to pursue new sources of income or loans. It can lay off employees, sell off assets and shut down satellite businesses or subsidiaries if unprofitable. However, the creditors can object to the company’s handling of its business if they can show that it is not operating in their best interests. Also, major business decisions are subject to approval by the court

Like a Chapter 13, the company has to submit a Disclosure Plan that outlines the corporation’s assets and liabilities, accounts receivable, tax consequences and what the creditors can expect to be paid over the life of the plan. A Creditors’ Committee or committees is formed to consider and vote on the plan or submit its own. Once approved, the trustee oversees the company operations. Monthly reports are submitted and payments are made and distributed to the creditors.

Some companies do thrive under Chapter 11 and there are a number of success stories like that of Johns-Manville, General Motors, United Airlines, Delta Airlines and Eddie Bauer. Some companies, like Eddie Bauer, end up merging with other companies or being bought out.

Under a Chapter 13 or 11, your company can reorganize, scale back on certain operations and develop new strategies while you no longer have to deal with lawsuits and seizure of your assets by judgment creditors. In other cases, however, seriously consider whether persevering with a non-profitable company is worth your continued efforts and money. If not, consider a Chapter 7.

Chapter 7

A Chapter 7 is a liquidation of debts. You and your company may retain any assets that are exempt under state or federal law or whichever set of exemptions your state allows you to use. You do have to qualify for a Chapter 7 pursuant to a means test but you will likely qualify if your business is not making money and has no prospect of future earnings. If you do not qualify at all, your option is Chapter 13 or 11. There are qualifications for those as well.

Any unsecured debts are discharged under a Chapter 7. For secured debtors, you can return the collateral used for the loan, agree to keep paying off the debt, or pay it off in a lump sum for its market value or any other agreed price. If the debt concerns real estate or some other valuable asset and you are behind on payments, the court can lift the automatic stay and allow a foreclosure action. You can only stop it by filing under Chapter 13 or 11 if those filings are feasible.

Consider the DCDM Law Group

You are not alone if your business has not lived up to expectations. At the DCDM Law Group, we have counseled thousands of clients whose businesses are not producing or that are overextended. If feasible, we will work with your creditors to manage your debt or suggest bankruptcy to either give you relief so that your business may continue operating while pursuing different strategies or liquidate it so that most if not all of your assets are retained. Contact the DCDM Law Group if your business is struggling and see what legal options are best suited for your business situation.

Dheeraj K. Singhal
About the Author
I help people keep the things they want and get rid of the things they don't want. I have been a lawyer for over 12 years and there are few things I enjoy more then getting great results for the people that trust me with their legal problems.