The downfall of a business is one of the most challenging and emotionally distressing events that can happen to anyone. It is heartbreaking to see everything you build from the start of your career crumbling down, not to mention the feeling that you can’t do anything about it.
Unfortunately, this unwanted situation is quite common, particularly for startups and small businesses that have existed for less than five years. They fail because of the following common reasons:
- Limited Cash Flow – Businesses that don’t have enough funds to support their operations often close down after some time.
- Lack Of Management – Businesses that don’t have enough specific departments lack the efficiency of more organized companies, resulting in poor production.
- Marketing Misfortune – Marketing is an essential element that will boost business sales. If marketing fails, you’re just wasting the company’s time, money, and effort as you’re not getting enough visibility and potential customers.
If your business starts to fail, the first thing to do is protect yourself from potential legal demands and other mishaps. Failure to take the necessary steps will result in serious consequences, including some issues that may prevent you from starting a business all over again.
That said, here are some ways that may help you protect yourself when your business fails:
Forming An LLC
One of the most effective ways to protect yourself and your assets from being used as payment for your outstanding debts is to start an LLC or Limited Liability Company. It’s an important step if you think your business is gradually crumbling into pieces.
Forming an LLC will help you to become legally separated from your company. If you can no longer pay your debts using the company funds, debtors won’t be able to go after your personal assets, such as estate properties, cars, and bank accounts.
However, there are exceptions to this rule. You could still be accountable for personal debts you guarantee, and, if you are indeed liable, you could be sued for your misconduct. You may want to consider the following tips to get the most out of your protection:
Acquire LLC Insurance
If someone files a lawsuit against you instead of your business, the LLC you formed won’t be able to protect you. Not to mention, the degree of damage it can incur you can be catastrophic. However, an LLC insurance will shield you and your company from getting sued.
Make It An Independent Business Entity
The court may take an LLC as an alter-ego if you and other owners continue to mix personal assets with that of your company to avoid tax liabilities. Therefore, make sure that your LLC will remain independent. It should have its own bank accounts, contracts, and other crucial files that must be signed on behalf of your LLC.
Transfer Company Funds To Your Personal Account Gradually
This is an effective technique since funds not linked to an LLC will not be liable to pay your creditors. But be careful because any transfer you make while you still have outstanding debts can be regarded as a fraudulent transfer, and you can be sued for that.
Never Guarantee Any Debts Personally
If your company starts to fail, all debts you have guaranteed have to be paid personally. This rule applies even if your business is incorporated or LLC, and even if they’re debts belonging to the company.
In most cases, a personal guarantee is a common requirement when filing bank loans, and you can’t do anything in this situation but agree to the contract. However, you can negotiate with landlords and suppliers to get the guarantee out of the process.
Secure Business Records
Bookkeeping is an important process that allows you to maintain and keep all crucial business documents safe. For example, keeping a record of all the money you invest in a business may grant you an ABIL or Allowable Business Investment Loss, especially when the business starts to fail.
An ABIL will help you reduce the tax you have to pay by weighing the money you lost against your personal income. This way, you can lessen the loss and recover some of the money you lost. That’s why it’s crucial to maintain good records, especially on how your assets are separated from your business.
Seek Professional Help When Necessary
In most cases, many business owners would want to do plenty of things all by themselves. Unfortunately, they often forget to seek professional assistance, especially at this point when money flows in, and this can be a serious problem in the future.
For example, having a lawyer who will help you document and record everything to secure your investment and protect you in case your business fails. Also, it would be best to consult a lawyer when you set up your business to protect personal belongings during a business disaster.
File For Bankruptcy
Legally speaking, you’re not allowed to close down a business while it still has liabilities to settle, such as outstanding debts and other deficits. Also, you can’t put your business on sale in the market while you have creditors waiting for you to pay them. However, there’s one way to protect you from these unfortunate circumstances, filing for bankruptcy.
Filing for bankruptcy is one way to get you out in the direst situations, but it should not be treated as ‘get out of trouble’ solution. You have to remember that filing for bankruptcy doesn’t mean you and your company will be free of any accountability.
During the process, all business assets will be seized and sold to reduce your debts as much as possible. It prevents your creditors from filing a case against you, which could be expensive and time-consuming, considering they have lost a significant amount of money.
Bankruptcy can give you another opportunity to start a new venture. But this time, make sure you operate the business properly to protect yourself from serious legal consequences that could hinder your progress again.
If your business fails, one of your top priorities is to protect yourself from possible liabilities, such as outstanding debts. Failure to take the first step will result in severe and costly legal processes.
You may refer to the discussion above for protection when your business venture fails. These include forming an LLC, avoiding guaranteeing debts personally, maintaining business records, seeking professional legal counsel, and filing for bankruptcy.
Lastly, you may have another chance to start a new business journey. But make sure to do what’s right to avoid facing hefty legal damages.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.