Read on to learn more about how business bankruptcy can be a viable option to get debt relief, and when business bankruptcy alternatives may be a better solution for you and your business.

How Can a Licensed Insolvency Trustee Help my Business?

A Licensed Insolvency Trustee can help your business because in Canada they are the only professionals empowered by the Federal Government to help both individuals and businesses legally restructure and write-off debt. For businesses, these insolvency options include restructuring through the Companies’ Creditors Arrangement Act, receivership, Division 1 Proposal, or bankruptcy.

If you think your business may be in financial trouble, here are some of the areas a Licensed Insolvency Trustee can help you assess and evaluate:

• Financial viability of the business and opportunities for turnaround
• Cashflow and financial statements of company
• Specific creditors the business owners should be aware of
• Pros and cons of restructuring the business

If you are a creditor with an interest in a business, a Licensed Insolvency Trustee may also help you review the business operations, viability and receivership appointments.

What is Business Bankruptcy?

Business bankruptcy is a legal debt solution that business owners may consider when a business cannot pay its debts, and business owners should also consider a Division 1 Business Proposal as an alternative to business bankruptcy.

• Before filing a bankruptcy or Proposal it’s important for business owners and stakeholders to understand the complexities of these processes, including all potential liabilities and repercussions of both unique options.

Bankruptcy for a Sole Proprietorship or Partnership

If your business is set up as a sole proprietorship or partnership you are not legally separated from your business – essentially the assets and debts of your business are also your personal assets and debts.

A business bankruptcy in this case would amount to a personal bankruptcy, or bankruptcy may be avoided entirely if you (the business owner) file a Consumer Proposal instead.

• Filing a personal bankruptcy (or Consumer Proposal) to deal with business (and personal) debts is a relatively straight-forward process.
• You are not required to shut down your business as part of these solutions.

The first step in the bankruptcy process is to meet with a Licensed Insolvency Trustee – there is no requirement for you to consult with a lawyer or accountant to start a bankruptcy.

How Do I Qualify for a Consumer Proposal? Learn More

Bankruptcy for a Corporation or Limited Company

If your business is incorporated, then by law it is considered its own legal entity. Many people think that by setting up a limited or incorporated business they are fully separating themselves from their business assets and debts, but that is not always the case.

Even if your business is structured as a corporation or limited company there is still a personal liability created for certain debts, such as money owing to employees for wages, and to Canada Revenue Agency for GST debt or payroll source deductions.

• Filing a bankruptcy for your corporation does not end the business’ existence; companies are not automatically dissolved because of a bankruptcy filing.
• However, unless the bankrupt corporation is able to later repay all the debts it owed at the time of the bankruptcy filing, it will ultimately cease to operate.

Learn More About Debt Solutions for Having Government Debts Forgiven

What Are the Main Steps in a Corporate Bankruptcy?

The following is a very basic overview of the key steps for business owners who want to file a business bankruptcy. It’s important to remember that a personal bankruptcy filing will generally not have the same steps involved:

1. Meet with a Licensed Insolvency Trustee

To file a corporate (or personal) bankruptcy you will first need to meet with a Licensed Insolvency Trustee to discuss and evaluate your situation. Generally, this first meeting will be to understand:

• The average revenue and profits of the business
• Who the business owes money to, and how much is owed
  • Whether any personal guarantees have been signed by directors or stakeholders
• Who the directors, officers and other stakeholders of the company are

The Licensed Insolvency Trustee will explain the general process of business bankruptcy to you and ensure that you fully understand the requirements.

2. Sign the Corporate Bankruptcy Documents

If a decision has been made to proceed with a business bankruptcy, the Licensed Insolvency Trustee will prepare official bankruptcy documents for you to sign.

Once you have read and signed all the official business bankruptcy documents the bankruptcy will be registered and your creditors will no longer be able to pursue you for debt payments or continue to attempt collection actions.

3. Complete the Corporate Bankruptcy Duties Required

 Some obligations may be required of the business owner. Some of these duties include:

• Attending a meeting of your creditors
  • Your Licensed Insolvency Trustee will hold a meeting of your creditors within three weeks of the date of the business bankruptcy
  • This meeting gives opportunity for claims of creditors to be reviewed, and for creditors to vote on some decisions that may need to be made
• Providing information to/help the Licensed Insolvency Trustee
  • You may need to provide the Licensed Insolvency Trustee general information about, or assistance with any assets that may be sold under the bankruptcy, or information about the company’s creditors

Once the administration of the business bankruptcy has been completed and there are no further duties required of the Licensed Insolvency Trustee, the Trustee will then apply to the court to be discharged (released), this essentially closes the bankruptcy file and there is nothing else to be done on the part of the business owner or the Trustee.

We understand that the decision to wind down a business that is struggling financially can be difficult and emotional. Connect with a local Licensed Insolvency Trustee to discuss your situation, get more information about how to manage business debts, and evaluate all possible debt solutions available to you.

The post Business Bankruptcy in BC appeared first on Sands & Associates.

Read on to learn more about how Division 1 Proposals can help to save a business. 

What is a Division 1 Proposal?

Debt settlement proposals for businesses are officially called Division 1 Proposals, which are an effective and flexible tool that can be used to eliminate business debt and save your business. 

A Division 1 Proposal can only be filed through a Licensed Insolvency Trustee and is a binding agreement with the company’s creditors to restructure their debts owing, usually by reducing amounts and/or adjusting interest charges and timing of required payments. 

• A key theme of a Division 1 Proposal is that it must offer creditors more than what they would receive if the business were to file a bankruptcy. The percentage of debt forgiveness and amount of debt repayment required under a Proposal often depends directly on the company’s cashflow.

How Does a Division 1 Business Proposal Work for Businesses?

The Licensed Insolvency Trustee works with the owners of the company to draft a Proposal that presents a “win-win” situation for both the business and its creditors. Typically, the creditors are asked to give up rights to the monies they are owed, in exchange for an offer by the company to pay a percentage of the total debt (i.e. so many cents on the dollar) over time or sometimes as a lump sum payment.

• In a successful Proposal, the company wins because it survives, free from the burden of its debts.
• The creditors win because they retain a customer and get some of their money repaid, whereas in a bankruptcy they are likely to receive very little.

If you are a business owner having difficulty paying yourself a salary from your business or are falling behind in debt payments or tax obligations such as GST, employee source deductions, or income tax remittances, a Division 1 Proposal could be an option for your business.

How is a Division 1 Business Proposal Structured?

Division 1 Business Proposals are normally structured as a payment plan over a set period of time, or sometimes as a one-time lump sum payment, however, Proposals can be flexible and as creative as needed – no one size fits all! Since one of the few requirements is that the business’ Proposal must offer more to creditors than a bankruptcy, this allows for a wide range of Proposal terms to be considered.

As a Proposal is a transparent, legally-supervised process, there may be other circumstances where a Proposal can make sense, beyond solely helping a business continue as a going concern. For example:

• A Proposal could be used to wind down a company with the business owner in control, or to conclude non-profitable arms of a business.
• A Proposal could also be used to sell non-performing assets in an asset-rich, cash-flow poor scenario.

Before eroding your personal assets or net worth to finance your company obligations, talk with a local Licensed Insolvency Trustee confidentially at no cost to discuss your situation and business debt solutions.

What Does a Licensed Insolvency Trustee Know about Saving a Business?

Many Licensed Insolvency Trustees are also designated accountants (CA/CGA/CMA), Management Consultants (CMC), and Chartered Insolvency and Restructuring Professionals (CIRP) with years of professional experience assisting businesses in financial difficulty.

Does it Cost Money to Talk to a Licensed Insolvency Trustee? 

A Licensed Insolvency Trustee can offer a fresh perspective, experience, and a full toolbox of options to solve your business’ debt challenges. Confidential initial consultations are offered at no cost or obligation.

What Would be Discussed in the Initial Meeting? 

The first goal when speaking with a Licensed Insolvency Trustee is often to determine if the business is worth saving. 

• In assessing the viability of a business, together we’ll review the operations of the company, its financial statements and its ability to generate cash flow.
  • The amount of cash-flow a company can generate, and the value of its assets is a key factor in determining the options business owners have.
• In order to provide you as much assistance as possible, we suggest that you prepare a list of your business creditors and most recent company financial statements for your initial consultation.

When Should a Business File a Division 1 Proposal?

Generally, a company might consider filing a Proposal when it becomes difficult to pay its trade accounts, payroll or other bills. The sooner the business’ financial standing can be professionally assessed, the greater its chances of survival.

Some common business owner reactions to a shortage of business funds are to:

• Apply for more credit.
• Inject personal equity (cash or assets) to fund or support the business.
• Make the mistake of delaying payment to Canada Revenue Agency (“CRA”) for GST or employee source deductions.

Rather than solving the debt problem on a long-term basis, all three of these actions tend to increase the business owner’s personal liability associated with the company.  

Learn More About Business Debt Mistakes to Avoid

What Creditors Should Every Business Owner be Aware of?

Business owners should be aware of all the company’s creditors, including those that give rise to director liability and/or personal liability. Common examples are:

• GST/source deduction debts to Canada Revenue Agency.
• Personal guarantees, whether to a bank, credit card, landlord, or trade creditor.
• Wages owed to employees.

When Would a Business Not be Worth Saving? 

Usually, a business is not worth saving through restructuring if the company is suffering continual losses and there are no apparent solutions to return it to profitability. In this situation, a voluntary business bankruptcy may be an option to write-off the business debts. 

Key Steps in a Division 1 Business Proposal

1. Notice of Intention to Make a Proposal

If a company fears that a creditor is going to take some action to shut the company down, such as obtaining a judgment or seizing assets, the company can file a Notice of Intention to Make a Proposal with the assistance of a Licensed Insolvency Trustee.

• The Notice of Intention to Make a Proposal is a legal document and upon its filing a “Stay of Proceedings” is started.
  • A Stay of Proceedings is essentially a “timeout” and protects the company by preventing creditors from taking any further collection action against your company.

2. File a Proposal

The company works with a Licensed Insolvency Trustee to formulate a Proposal. Once the Proposal is finalized it will be sent to your creditors by the Licensed Insolvency Trustee so they can consider the offer and vote in favour of or against the Proposal.

3. Meeting of Creditors to Consider the Proposal

Creditors vote on the Proposal by mail or in person at a meeting of creditors, which is held approximately three weeks after the initial Proposal is officially filed.

• The Licensed Insolvency Trustee must file a report to the creditors about the affairs of the company and causes of the company’s financial difficulties.
• The Licensed Insolvency Trustee must also present to the creditors his or her estimate comparing how much money the creditors would receive under both the Proposal and a bankruptcy. (Remember, the Proposal must provide creditors with more money than a bankruptcy.)

If the Proposal is accepted by the creditors and subsequently approved by the Court then all unsecured and secured creditors to whom the Proposal was made are legally bound by the terms of the Proposal – this includes any creditors who did not vote in favour of accepting the Proposal.

• For a Division 1 Proposal to succeed, a majority in number of creditors, and two-thirds in value of debt, must vote to accept the Proposal.
• In the event that the Proposal does not receive the required votes to pass the Proposal then the company is entered into bankruptcy, effective the date of the creditors’ meeting.

4. Complete Proposal

Once accepted, all creditors and the business must adhere to and complete the terms of the Proposal. The business has now achieved a ‘second chance’ at success. 

Still not sure if a Division 1 Proposal is the right solution for your business? Talk to a Licensed Insolvency Trustee today to explore your options.

The post Division 1 Proposals for Business Debt appeared first on Sands & Associates.

Given the difficulties of starting and maintaining a successful business, it’s no surprise that as Licensed Insolvency Trustees we often meet with business owners who are struggling with business debts simply because they didn’t know the liabilities they were taking on, or what to do when they wanted to wind the business down. Read on to understand some basics about business debts, common mistakes to avoid making in dealing with business debt, as well as information about getting debt help for small businesses.

Business Debt Basics

Here are some basic components of business debts that you should be aware of since the finances of a business are often interwoven with personal finances of owners and directors which can create unintended consequences.

Types of Businesses

In Canada there are three common types of small business structures and each one has advantages and disadvantages depending on the business owners’ goals and objectives and will have different requirements to set up. An accountant or lawyer can be a great resource for you when setting up your business, helping you weigh the pros and cons of each structure and ensuring you are not missing key setups like licenses, WCB or other insurances.

Sole Proprietorship

A sole proprietorship is the most straight-forward way to start a business or become a contractor. Essentially you (the owner) and the business are the same entity and not legally separated – the assets and debt of your business are also your personal assets and debts.

Partnership

If two or more people are combining resources in a business they may (but are not necessarily required to) establish formal terms and become a partnership, which is relatively easy to get underway. Each partner is personally responsible for the debts of the business, and they share in liabilities of the actions of the other partners.

Corporation

Incorporating your business takes more time to establish and is often more costly than setting up other types of business structures, but it means that the corporation is a legal entity separate from its shareholders. A limited company, or corporation, is essentially a separate legal “person” and can hold assets, acquire debts and contracts, sue, or be sued.

 Learn the 4 Financial Professionals Everyone Should Know

Common Problem Areas of Business Debts

At any time in business, and particularly in the start-up stages, business owners will often accumulate credit card or line of credit debt used to fund their operations. Be sure to track and retain documentation for all your expenses – not only will you need these for tax filings, keeping proper business records will enable you to understand whether your business is turning a profit versus becoming a liability.

Debts a sole proprietor or partnership accumulate are payable by their owners since there is no distinction between business and owner. While corporations may protect owners from their debts to some degree, there is still a personal liability created for certain debts you cannot avoid becoming personally responsible for such as GST and payroll remittances, employee wages, as well as debts you have personally guaranteed (i.e. committed to pay in the event the company cannot). Some common problem types of business debts owners often face are those owing to the Canada Revenue Agency (“CRA”).

It’s extremely important for business owners to understand their responsibilities for tax compliance and know clearly what they need to file with CRA. CRA debt is one of the top reasons we see small business owners needing debt help. In addition to general corporate tax debt, some key areas to be aware of are:

Collecting and Remitting GST

• If your business earns more than $30,000 revenue in a year, you will need to register with CRA, obtain a GST number to file GST returns and make remittances to CRA.
• There are a small number of professions where this will not apply, but in most cases CRA will assess GST against a self-employed person even if they have failed to register, charge, and collect the GST from their customers.

Payroll Source Deductions

If you pay salaries, wages or give a taxable benefit to an employee, you must take source deductions from that amount, which then need to be reported and remitted to CRA. Source deductions include: CPP contributions, EI premiums and federal and provincial income tax.

• New employers may be surprised to learn that in addition to withholding source deductions from an employee’s pay, they are also required to pay a share of CPP contributions and EI premiums on those wages.
• If you’ve had employees previously and then have seasonal workers or no employees in a period, you’ll still need to report a “nil remittance”.

Personal CPP and Income Tax

Newer small business owners often wind up with a tax balance bigger than they were expecting because tax requirements for a self-employed individual may create a higher tax liability than if they had continued to operate as an employee:

• When you’re self-employed you are required to calculate and remit money payable not only for income tax, but also for CPP.
• Even if you’re not required to make income tax instalments (i.e. monthly advance payments on your tax bill) throughout the year, we strongly recommend doing so to avoid the temptation of spending all your profits and having to deal with a big tax balance when you file your return next year.

How Can a Consumer Proposal or Bankruptcy Help with Tax Debt? Learn More

In addition to unpaid CRA debt, other common areas of debt issues for businesses include:

• Outstanding wages owed to employees or contractors.
• Unexpected increase of operating costs such as a rent or supplier price increase.

Business Debt Mistakes to Avoid

Unfortunately, some decisions business owners may make when facing financial difficulties can increase their personal liability – meaning the separation between your corporate and personal dealings is reduced (or eliminated altogether). This is often colloquially referred to as “piercing the corporate veil”. If you find yourself dealing with business debts, avoid making these common mistakes that often compound the problem:

Ignoring Accounting or Planning

Planning cash-flow short-term and long-term is a key piece of your business success. Without it, many self-employed people find they’re overwhelmed with the paperwork needed in even a basic small business and are unprepared for any delays in collecting their accounts receivable, paying employee wages (or themselves), or dealing with inevitable operating cost increases. This can often result in them becoming over-dependent on credit or borrowing to make ends meet.

Procrastinating

Waiting too long to assess your financial situation and options often results in making reactive or unwise decisions that can have serious consequences on your personal (and business) finances.

• In some cases, options may also become not feasible once too much time has passed, or the circumstances become urgently pressing.
• To properly consider all strategies available to you as a business owner, it is imperative to be proactive and seek assistance at the earliest onset of financial difficulties.

Injecting Personal Funds

While a business may initially require a personal investment, a business that is running smoothly and viable long-term should not require you to continually inject personal funds. If you are starting to consider (or already taking) these actions, stop and take a closer look at what’s happening in your business:

• Using personal credit or personal guarantees to cover costs.
• Being unable to draw a salary/pay yourself.
• Borrowing money from family or adding them as directors.

Borrowing More

Even if it is possible to obtain more credit, be cautious before doing so. Especially if you are already in a position of having difficulty meeting your current obligations, adding more creditors is unlikely to be the solution.

Postponing CRA Payments

Although it can be tempting to defer payments to the government or to use money earmarked for CRA remittances to fund operating expenses – this can have serious consequences, so our strong recommendation is: just don’t do it!

• Filing GST or corporate tax returns late or not paying CRA those funds on time is an easy way to get into financial trouble, likewise for failing to make income tax instalments CRA may require.
  • Interest and penalties are charged daily on these balances.
  • Directors of limited companies are personally liable for some debts with CRA.
• CRA can employ extreme collection methods if tax debts are left unpaid. It is common for people to experience a bank account freeze, garnishment (yes, self-employment income can be garnished!) or even a charge against their physical property or real estate due to owing CRA.

Learn More About Solutions for Government Debts

Where to Get Help with Business Debt

Licensed Insolvency Trustees can help a business owner evaluate their business and decide on how best to deal with both personal and business debts that have accumulated. They are the one debt help professional legally authorized and endorsed by federal and provincial governments to administer powerful solutions to deal with debts from both business and personal perspectives.

There are many factors in addition to your goals as the owner that a Licensed Insolvency Trustee will take into consideration when helping you assess your financial situation and potential options for your small business, including:

• The type of business structure you are operating and any other key parties involved.
  • For example, if you are operating as a sole proprietor filing a Consumer Proposal or personal bankruptcy may be possible solutions to deal with debts from your business along with any other debts, since your business debts are also your personal obligations.
• The creditors who are owed money and the type of debt that has been incurred.
  • As noted, not all creditors are created equal – particularly where CRA is owed money.
• The assets the business holds, its general cash-flow, financial statements, and viability.
  • Owners wishing to avoid a business bankruptcy may be able to work with a Licensed Insolvency Trustee to offer the business creditors a consolidated debt settlement that can greatly reduce balances owing and allow the business to continue to operate.

There is no cost to connect with a BC Licensed Insolvency Trustee to discuss your business debt and confidential consultations can even be conducted from the comfort and privacy of your home.

The post Small Business Debt – Basics, Challenges & Solutions appeared first on Sands & Associates.