Tunkhannock, PA asked in Bankruptcy for Pennsylvania

Q: My wife and I are sole shareholders of an S-Corp. I am the only employee.

Business has declined over time due to technology to the point of not generating enough income. There is over $38.000

in business debt. Should we close the business and declare bankruptcy and are we responsible for any of the debt individually?

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2 Lawyer Answers
Cristina M. Lipan
Cristina M. Lipan
Answered
  • Bankruptcy Lawyer
  • Brooklyn, NY

A: Either or both of you may be personal guarantors on some of the debt, so you'll have to check the agreements with those creditors to confirm. Even if you're not personal guarantors, and although the corporation generally shields you from personal liability, there is a possibility that a creditor can "pierce the corporate veil." This can happen if you don't follow proper procedures for a business, which commonly happens with closely held companies such as yours. Most creditors won't go through the trouble, but it's something you should be aware of.

Information provided for informational purposes only and should not be taken as legal advice.

W. J. Winterstein Jr.
W. J. Winterstein Jr.
PREMIUM
Answered
  • Bankruptcy Lawyer
  • Boyertown, PA
  • Licensed in Pennsylvania

A: If the business prospects are for continuing losses, then yes, cease its operations. If you have "observed the corporate formalities", e.g., kept corporate minutes book with at least annual meetings of directors and shareholders, and entered minutes of those meetings, and otherwise kept the corporate identity separate from your individual identities, and especially, not intermingled corporate funds with your individual funds/accounts, then you should not be personally (individually) liable for corporate debts; Provided, that you have not signed personal guaranties of the business debt (most banks, sometimes suppliers, require the personal guaranty(s) to advance credit to a small, closely held corporation).

If the corporation owns assets, and has given a security interest to any creditor, then the secured creditor can repossess the collateral after a default in payment of the debt.

I'd need more facts, about the debt picture and loan and security agreements, if any, to give a better answer. I have done business terminations without the need for filing a bankruptcy. The choice is driven by the facts of each case.

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