Many people in California strive to start their own business. They do not necessarily want to create the next Fortune 500 company, but want to build something that is productive and profitable. Even those who are interested in starting a major business start smaller. With any business idea - even the best ones - there is apt to be a struggle. Financially, many businesses need to take steps to reorganize using the bankruptcy laws. One method to do that is Chapter 11 bankruptcy. While this is generally used by larger corporations for the purposes of reorganization, it can also be used by qualifying smaller businesses.
A business with less than 500 employees is defined as a small business. This definition comes from the Small Business Administration. Most Chapter 11 bankruptcies are for these small businesses. Sometimes, depending on the situation, the initial Chapter 11 filing will be converted to a Chapter 7 liquidation. However, this occurs if the court determines that the business is not going to turn around and become profitable. For small businesses that have a solid idea but are struggling financially, Chapter 11 might be beneficial.
The law states that a small business debtor is person engaged in business whose debts are $2.556 million or less when they file. There are certain requirements small businesses must meet for Chapter 11. They must provide the most recent balance sheet; a statement of operations; their cash flow statement; and the latest federal income taxes. The court will look closely at a Chapter 11 filed by a small business paying special attention to the profitability, cash flow and payouts. There will be additional monitoring by the U.S. trustee for a small business Chapter 11.
With Chapter 11, the business will have time - 180 days - to file a plan and to renegotiate with creditors. It can be a costly endeavor and if the business is not promising, Chapter 7 might be a better solution. The cost with Chapter 11 might be worth it if the business is viable and the Chapter 11 will salvage it. When a small business owner is having financial issues, Chapter 11 might be a reasonable option if the situation warrants it. Speaking to a legal professional experienced in all aspects of bankruptcy can help to make an informed decision and to move forward.
Source: FindLaw, "Chapter 11 bankruptcy -- Chapter 11 for Small Businesses," accessed Nov. 14, 2017