Basic Training: G is for Get Your House in Order

Posted on May 19, 2015 in Money & Finance

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When you start a business and it doesn’t do well, there can be consequences. Financial ones, especially. If you want to stick it to your creditors and walk away from the whole depressing, unprofitable endeavor, you can–that is, you have the ability to, provided that you’ve formed a limited liability entity, and “fraud” is not among the reasons for the business failure. I have my own feelings about whether that’s an honorable way to conduct business . . . but that’s not a legal issue.

Can you stick it to your creditors and start a new business by using the same entity? That’s this week’s issue:

Q.: I own an LLC that started in 2005. I have now stopped operating this business since it was not successful. I owe suppliers more than $40,000. Some of the suppliers have stopped collection, but some still continue to try collecting the debt. I want to keep this LLC to start another business because it has a few years’ worth of history, which can help in dealing with new suppliers. Should I form a new LLC for my new business or continue with the current one and try to negotiate with them when this new business is profitable?

A.: If you have outstanding debts with your current LLC and want to continue to use it, the history that will show up when you try to approach new suppliers is all of the debt you didn’t pay in connection with the earlier, unsuccessful business activities. Once the actively collecting suppliers start to file lawsuits against your LLC, that litigation will be a matter of public record for all to check. Your history with your current LLC, such as it is, is a bad credit history. That can be worse than having no credit history.

Why on earth would you want to saddle new business activities with that association? If you want your new business venture to have a fresh start, start with a new entity.

However, that doesn’t mean there won’t be lingering issues concerning your current debt. If you gave any personal guaranties for the business debt, you can’t get out from under it simply because the company isn’t operating. That will come out of your personal pocket. In deciding whether to give you any credit, new suppliers may also ask whether you have owned any other companies . . . in which case your prior history of “walking away” might come to light.

Your best bet is to speak to a business attorney and a financial advisor to make sure you get your house in order in clearing up the past with the old business and starting the new one. Make sure you have a solid business plan in place so you can evaluate whether the new venture is really worth pursuing and whether you’ll be able to keep current with your obligations to creditors this time.

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