Question about money in our LLC's bank account?

[marie]

I have retained an attorney who specializes in Bankruptcy, business law, and asset protection. My husband and I are s corp, and need to file personal bk but keep the business, as it is our only source of income.

some of the cc's are personal, others are business with a personal guarantee. business has a few assets which are essential to the running of the business, Truck, tools, computer etc.

He told me that if the business LIABILITIES (cc's ) are more than the business ASSETS ( trucks etc ) then the Value of the corporate stock is Zero. he did not seem to think that the trustee would be interested in it.

we can file personal BK and have everything discharged. That will absolve us of personal liability for the corporate debt. However, as we need to still operate the business to make money to live, the business creditors could still try to sue the business. The solution, as he advised us, is to open a new LLC, and let the old corporation dissolve.

The new LLc can purchase the truck etc, as long as it is at or close to Fair market value. The payments can be arranged from the new LLC to the old corp on a monthly basis, over a period of 4 or 5 years. it may be an amount of $100-$200 a month.

The creditors may or may not go after that money, but if they do, its a relatively small amount, and they cannot come after the truck and other stuff.

He is very experienced and has been doing this for 19 years, and also publishes a blog about BK and asset protection.

[onwards]

I am trying to understand this.

So they will take the LLC? The $8k? My desk, computer and monitor? What if the LLC has expense to still be paid out of the $8k?

If I have the check from the client and have not deposited it yet, but have not executed the agreement (I have not signed it yet, client has signed) that requires the payment, is it a pending transaction and not yet A/R? Can I sign the contract the day after I file and deposit the check then?

I appreciate the help!

I am not a lawyer, but speaking from my own recent experience. With a proper filing, nothing will be touched. It is UNDERSTOOD that a cashflow business (like a consultancy) has to be cashflow even or positive to survive; the trustee is not an idiot. The cashflow itself is an asset in the sense that future payments your business has a claim on at the the time of filing are counted, but the business expenses are ALSO counted.

For example, in our case we charge a company about $15,000 (including expenses) each month for one of our guys. He gets paid the bulk of that amount, part as his renumeration and part as his reimbursements. In the two months following the filing it was closer to $20K. Our margin on this guy is pretty thin - $1000 a month. The $20K is NOT an asset that your creditors can have; the guy has a more senior claim to it! what they CAN have, in theory, is the $1000, but that's a much smaller amount and as someone else pointed out, easily eaten by normal business administrative upkeep.

[Feelbad]

doh....what makes you think you may be getting erroneous advice?

From article referenced earlier in the thread -
All of this loses any relevancy when we are dealing with a single-member LLC. Since the debtor's interest in the LLC passes to the DIP or trustee upon the filing of the bankruptcy case by operation of law, the DIP or trustee obtains the ability to consent to a transfer of that interest. A recent decision from the U.S. Bankruptcy Court in Colorado, In re Ashley Albright, case number 01-11367 ABC (Bankr. D. Co. 2003), makes it clear that the trustee, as the sole member of the LLC, has the ability to provide consent to the transfer of a member interest in a single-member LLC and can otherwise exercise management control over the LLC. The trustee can either transfer the member interest or just liquidate the assets of the LLC and realize their value as the sole member.

From a TX law site -
Also, for limited liability companies governed by the Old Act, unless the Regulations provide otherwise, the limited liability company shall be dissolved uponbankruptcy or dissolution of a member

[AllMyFault]

Folks, I just went through this. My wife and I own an LLC in CA, which is a cashflow business (no tangible assets). The trustee looked at it, examined the books, asked for all bank statements since the beginning of the year to verify for himself that indeed it is as I said it was, and then exempted it from proceedings. I just got discharged and the business is still alive and kicking in the exact same form as before.

It generates $40K per month and pays out about as much, so it's not an issue of amounts. It's just a matter of providing solid records. The LLC had at different points in time during the proceedings up to $50,000 in the account (money coming in with payments yet to go out) and was not touched.

So no, you don't automatically lose a business. I am happy to answer any questions based on my experience, but I just wanted to let the OP know about my own very recent experience (I filed late august this year and got discharged last week).

Hey onwards...thanks a bunch for the post. One attorney I saw said that is exactly how the court would handle my case but another atty and people here make it sound quite opposite....like personal bk is basically the end of the business. How many owners / managers in your LLC?

[Feelbad]

I am not a lawyer, but speaking from my own recent experience. With a proper filing, nothing will be touched. It is UNDERSTOOD that a cashflow business (like a consultancy) has to be cashflow even or positive to survive; the trustee is not an idiot. The cashflow itself is an asset in the sense that future payments your business has a claim on at the the time of filing are counted, but the business expenses are ALSO counted.

For example, in our case we charge a company about $15,000 (including expenses) each month for one of our guys. He gets paid the bulk of that amount, part as his renumeration and part as his reimbursements. In the two months following the filing it was closer to $20K. Our margin on this guy is pretty thin - $1000 a month. The $20K is NOT an asset that your creditors can have; the guy has a more senior claim to it! what they CAN have, in theory, is the $1000, but that's a much smaller amount and as someone else pointed out, easily eaten by normal business administrative upkeep.

onwards, thank you for chiming in. It is reassuring to hear from someone in a similar situation with the same corporate structure that has been through this already.

In your situation your (I assume) W-2 employee would have the priority claim over a creditor. Of the $8k I would have in the account, I may or may not be required to take on additional expenses to fulfill the agreement with the client. Do you think this would affect the decision by the trustee? I realize you are not an attorney and am simply asking based on you experience.

[Feelbad]

lol We're fixin to gang up on you onwards! I do appreciate hearing your experience.

[StartingOver08]

Feelbad, to clarify a little, I was NOT required to close my S Corp by the Trustee. I elected to close that S Corp because of the corp debt that was not discharged in my personal Ch 7. The corp debt was not very large (just over $50k) but the personal Ch 7 did discharge my personal liability but not the corp liability. My attorney explained that the corp creditors could/would just get a judgment against the corp for the corp debt and any funds that I deposited in the corp bank account would be seized. Because FL has such small exemptions it was not possible to set aside anything to keep the corp active and the creditors happy while I ramped up the business again. I elected to continue business under another format, rather than use that S Corp.

As to wages, onward is right, the wages due have priority. By the time I filed (personally) I had let go my assistants so did not have that issue. I did find a site that touches on wages and bankruptcy here, but did not do any more research that Feelbad has already stated: http://www.wagehourblog.com/2009/08/...on-bankruptcy/

[JustDamn]

I think I'm more confused, thanks for the post feelbad (really). I'm a 60% owner in a llc partnership (fiance is the other 40%).

I don't know if the laws in regards to LLC and bk differ from state to state or not, but this is a very interesting thread.

I've just written my attorney an email with a question in regards to our LLC...this thread got my mind churning about whether after bk while the LLC is still an "entity" (if it doesn't just go "poof" with the bk ), if it would be possible to convert to a sub S corp (which is allowed under normal circumstances in GA).

We've built a good rep (remodeling firm) with clients/suppliers/sub-contractors over the last 6 years and would hate to lose the name recognition if at all possible.

[JustDamn]

Thanks for your feedback as well StartingOver.

J

[onwards]

Hey onwards...thanks a bunch for the post. One attorney I saw said that is exactly how the court would handle my case but another atty and people here make it sound quite opposite....like personal bk is basically the end of the business. How many owners / managers in your LLC?

Two owners - my wife and I.

Note that my wife was NOT included in the bankruptcy. That could have made the trustee's job had he decided to liquidate the LLC just a bit more complex, because my lawyer was ready to object on her behalf. But at the end, the following factors played:

1) the LLC was not a single-owned (single-member) entity (which, according to my lawyer, made it less obvious to close down)
2) the LLC did not have tangible assets
3) the LLC did not have more assets (in terms of cashflow) than liabilities

[JustDamn]

Good info onwards, thanks. If I may ask (or maybe I missed it above), did you have any personally guaranteed cc's/lines of credit for your LLC?

And I'm reading that your LLC survived through bk in fine shape?

Thanks.

J

[onwards]

onwards, thank you for chiming in. It is reassuring to hear from someone in a similar situation with the same corporate structure that has been through this already.

In your situation your (I assume) W-2 employee would have the priority claim over a creditor. Of the $8k I would have in the account, I may or may not be required to take on additional expenses to fulfill the agreement with the client. Do you think this would affect the decision by the trustee? I realize you are not an attorney and am simply asking based on you experience.

Actually, we don't have W2's at all; not even my wife and I. Everyone is a 1099er (I am allergic to fixed costs and labor laws in CA make it very expensive to have W2's).

As owners, we get paid by distributions rather than salary. In other words, we draw upon the balance in the business account once all the business expenses are paid (including payments to non-owners like the guy I mentioned). This made it very simple to show that there is no excess or assets available, and that our income from the business is properly reported in our filing.

One thing I DID do based on my lawyer's advice was pay ALL outstanding business expenses before the filing (frontloading them to a degree). They were all legitimate, but for example, you can pay your general liability insurance in one lump sum rather than payments, your company health insurance premiums for several months and so on. As long as you do this within reason - and that's where a good lawyer is worth their weight in gold - it will not be an issue or be considered potentially fradulent.

My feeling having gone through the process is that there is a lot more room for flexibility in the bankruptcy code than people realize. It is made to sound draconic and scary, but in the end, like everything else, perception ends up being nine tenths of the law. A good lawyer will package things in just the right way to present to the court so as to avoid questions that might arise is things were presented differently. The facts don't change, but how they get communicated matters a WHOLE lot.

[onwards]

Good info onwards, thanks. If I may ask (or maybe I missed it above), did you have any personally guaranteed cc's/lines of credit for your LLC?

And I'm reading that your LLC survived through bk in fine shape?

Thanks.

Our business lines are personally guaranteed by my wife, who was not included in the bankruptcy, thus they were not affected.

That was in fact the major consideration behind not including her; otherwise we would have gotten rid of another $75K or so in debt that is in solely her name. We considered this carefully and came to the conclusion that the trade wasn't worth it. In other words, we preferred to keep the $75K in debt and her credit and thus the associated business credit lines. In this economy, we ended up deciding it was more vital to preserve access to our small business credit than eliminating another chunk of low-interest debt.

EDIT: and yes, the LLC survived intact with no changes at all. It is still functioning with the same TIN, too.

[JustDamn]

I just re-read some posts that I missed (yours included onwards).

From reading the responses it seems that if you have business debt with a personal guarantee, that the personal bk will still leave your LLC exposed to the personally guaranteed business debt if your LLC remains intact, as the creditors will continue to come after the LLC.

I think I get it....not sure. If this is the case, then it sounds like you might be in luck with an LLC, if you don't have any business debt for that LLC that you're vacating in a personal bk.

I'm still confused as the information that's out there that states that an LLC goes "poof" if a member (maybe just a single member LLC), claims personal bk.

J

[Feelbad]

StartingOver08 - Thank you for the input. I have found where c and s corps and even LPs can fairly easily survive a personal bankruptcy of a majority shareholder. What I read is that the LLC as a more recent business form doesn't seem to be afforded the same protection in most states. A handful have changed their laws to follow RULPA to prevent foreclosure of an owner's interest and forced liquidation of the business to satisfy a personal debt liability.

Texas has not and it appears the law actually requires the LLC to dissolve. The LLC form seems to protect the person from the liability of the business but the business from the person.

The trustee in onwards case followed logic. I just worry about depending on the trustee in my case to apply similar logic.

JustDamn - We're both confused!

I left messages with my attorney and my accountant this morning. I'll let you know what I hear.

AllMyFault - I felt like maybe I hijacked your thread yesterday so I posted my issue on this in the Business forum this morning. This one seems to be getting the attention though. I hope you don't mind.