Top 5 reasons why bankruptcy is actually better than just walking away from your business.
Everyday we speak with business owners whose small business is insolvent. Many have stopped operating their business, for others, they want to shut it down. The owners want to know if they can just walk away from the business or should they put it into bankruptcy.
You may be surprised to learn that the bankruptcy of a small business is actually the smartest thing to do.
We see too many small business owners choose to just walk away from their business rather than putting it into bankruptcy. Putting the business into bankruptcy provides closure and allows the business owner to transfer to a Licensed Insolvency Trustee the burden, time, and cost of dealing with creditors, filing tax returns and dissolving the company.
1. Doing nothing is not free.
When an insolvent small business collapses and a bankruptcy is not filed, the owner still has to work with their accountant to file future HST/GST and payroll returns, or they have to work with the accountant to cancel the HST/GST and payroll accounts. Their accountant is also required to file future corporate income tax returns. All of this costs money.
There are also additional costs to formally dissolve (aka wind up) the small business. Either the business owner will be burdened with the time it takes to dissolve the company themselves, or they must hire someone to assist in this process. In addition, a company cannot be dissolved until its debts are dealt with. The government also needs to agree to the dissolution. It is unlikely that the government will provide its consent if there are taxes owing.
Bankrupting a small business would end the requirement to file future tax returns, would deal with the debts (including taxes) and there would be no need to go through a formal dissolution of the company.
2. Doing nothing does not provide protection from creditors.
We often see small business owners spend a lot of time in court because their company is being sued. This can be very costly and time consuming. Even if the small business owner files a personal bankruptcy or consumer proposal, they can still be required to go to court on behalf of their company.
Putting a small business into bankruptcy will stop and prevent any legal actions against the company.
3. Doing nothing could result in the company’s charter being cancelled.
In the past, it was common practice for the government to cancel a company’s charter if tax returns were not filed. This can become a serious problem and a financial liability for the owners/directors of the company.
If a company’s charter is cancelled, the director(s) of the company become personally liable for new business debts. This personal liability would provide Canada Revenue Agency with enhanced rights against personal assets as well as result in the director being personally liable for debts to suppliers and other creditors.
Filing a corporate bankruptcy dissolves the company and prevents the director from being personally liable for future debts.
4. The company is still required to incur the cost of filing tax returns.
If the government does not cancel the charter, then the company will continue to be required to file corporate tax returns, even after the business has ceased operations. When a company goes bankrupt, the Trustee will file tax returns and there will no longer be an obligation to file future returns.
5. Doing nothing can make it more difficult to write off losses against personal income.
An Allowable Business Investment Loss (ABIL) is available for people who have lost money in a Canadian Controlled Private Corporation. An ABIL allows the person who lost money in the business to write off a portion of the money lost against personal income, thereby reducing the amount of personal income taxes they pay. The Canada Revenue Agency reviews all ABIL claims very closely. The bankruptcy of a company is the fastest and easiest way to prove that the money invested in the business cannot be collected.