Dissolution and Winding Up a Business

Since the beginning of the pandemic, one of the main questions I get from struggling business owners is how to dissolve a business or declare bankruptcy. There is a litany of reasons to close your business. The most common problem right now is that company owners get so in debt to their landlords and vendors that, even if business suddenly turned around, they won’t be able to dig themselves out of debt. When faced with that situation, sometimes the only answer is to wrap up the business.

Dissolution vs. Bankruptcy

If you’ve decided to close your business, you might wonder if declaring bankruptcy is a good option for you. For most owners, bankruptcy for the business usually means bankruptcy for them personally. This occurs because most business owners have personally guaranteed the debts of their company. Therefore, if they declare bankruptcy in their business, the debts would simply pass to them personally. Then they would need to either pay the debts themselves or declare personal bankruptcy to avoid the liability. For many owners that is not a good option.

By dissolving the company, an owner still maintains the power to negotiate the debts owed. In many cases, the creditor is willing to negotiate to settle the claim. For example, a landlord will usually agree to settle an outstanding balance if it means terminating the lease. They get some money and, hopefully, a new renter that can actually afford to pay.

I don’t want to give the impression that all creditors negotiate. The fact is that some creditors have been unwilling to work with debtors during the pandemic, and because most of the protections put in place don’t apply to businesses, creditors are not as incentivized to negotiate. For example, there is no moratorium on evictions for commercial spaces.

Dissolution Triggers

How do you start a dissolution? Pursuant to 805 ILCS 180/35-1, dissolution can be commenced in one of five ways: (1) upon an occurrence of an event specified in the operating agreement, (2) upon the consent of all members, (3) if there are no members for 180 days, (4) by judicial decree, or (5) if the company has been administratively dissolved.

The most common of the above circumstances is based on consent of all members. Basically, everyone agrees that it’s time to close the business.

What if the owners can’t agree? One member may petition the court to dissolve the company. In that case, the company will be dissolved under the fourth item listed above.

What Happens in a Dissolution?

When you dissolve a company or LLC, you must satisfy all debts to creditors before distributing anything to the owners of the company. Pursuant to 805 ILCS 180/35-10, only after everything is satisfied can the rest be divided among the owners of the company.

That seems fairly straightforward, but in practice this can get a bit messy. For example, what if an owner is also a creditor? If an owner loaned the business money, which happens all the time, that owner may be eligible to receive payment for its loan before a distribution can be made to the owners. This can cause quite a bit of in-fighting among members of a company.

 What Can Go Wrong in a Dissolution?

The easy answer is that a lot can go wrong. Obviously, the larger the company and more complex the structure, the more trouble is caused. Generally, if the owners pocket money or assets without observing formalities, they will be liable to other owners and creditors. The dissolution cannot turn into a free-for-all.

In the event formalities are not followed, creditors will likely be able to pierce the corporate veil, which means target owners individually. Therefore, if you don’t follow the rules, you run the risk of being held personally liable for the debts of the company, essentially defeating the purpose of the limited liability company.

Commercial Leases – Part 4

It’s been a while since I wrote about commercial leases, but I wanted to finish up my series by discussing use, maintenance and repairs, and subleasing. If you’re interested in my last articles, you can find them here.

Use

When I discuss use in the context of a lease, I’m referring to the way that a tenant is allowed to use it’s space. Technically, a lease allows you exclusive possession of a space to use as you like, but most leases limit your use to something reasonable for the building.

For example, I have an office in a bank building. There are other offices in the building. I’m permitted to use my space for any reasonable office function. I happen to run a law firm, but I could be an accountant or architect or something similar. I cannot open a glass blowing studio. That would require serious changes to my space that are not permitted by my lease.

Other specific uses might be outright banned by a lease. For example, it’s common for a retail lease to ban using the space for a second-hand resale shop. That’s because the landlord wants to project a certain image of its tenants and a resale shop might detract from that image.

Dangerous uses are usually banned as well. No storing dangerous items, for example. You’ll also see provisions banning strip clubs and adult book stores. The image is a problem, but there are also liability issues associated with those locations.

Maintenance and Repairs

Who is responsible for maintenance? This is a hot topic among clients. It usually comes up when something breaks. That’s when a tenant learns that they are on the hook for a new furnace or HVAC unit. A tenant should always review this section of the lease very closely, and if they’re responsible for maintenance of big-ticket items, they should learn about how old those items are and factor the cost of repair or replacement into the cost of their lease.

Generally, the larger your space, the more you’ll be responsible for. If you rent a small office, you might not be responsible for anything. My building pays for lightbulbs, for example. It’s common to be responsible for anything directly within your unit. If you have a bathroom, you’re probably responsible for unclogging it, etc. Normally, you don’t have to pay for items that are shared between units, like an HVAC unit. However, landlords try to add these things in whenever they can.

If you rent an entire building, you’re probably responsible for much more. This is especially true if you have a longer lease. Furnaces, HVAC, and plumbing are all usually your responsibility. Therefore, as the tenant, you should inspect those items to determine what repairs or replacement will be necessary and budget those costs into running your business.

Subleasing

Subleasing is another hot topic because most leases explicitly say you cannot sublease your space. Tenants don’t usually notice these provisions until they want to sublease. Then it becomes a problem.

Almost every lease says that the landlord must approve a sub-tenant, but there is usually another line that states that the landlord shall not unreasonably withhold its approval. Sometimes landlords remove that line, but the courts will still hold them to that standard. The landlord can’t turn away a reasonable sub-tenant.

The original tenant is usually still on the hook if the new tenant doesn’t pay. That is standard. Therefore, you should not bring a sub-tenant who you don’t believe will pay the rent. You could be on the hook for two leases if you’re not careful.

The other thing to consider is that if you bring a new tenant to a building and want to break your lease, they pretty much have to accept the new tenant as a sublessor because suing you for unpaid rent will be extremely difficult. This is due to a legal concept known as a duty to mitigate damages. If I break my lease, you can sue me for the unpaid rent until you found a new tenant and for the difference between what I should have paid and what the new tenant is paying. A landlord can’t just leave a space vacant. They have a duty to release the space in order to reduce their damages. If you literally bring them a new tenant, they have to accept it so long as it’s reasonable because if they don’t, they are failing that duty.

Conclusion

I have posted four articles about commercial leases covering all sort of topics. I think this will be my last one, but if you have any specific questions about leases or anything else, please free feel to reach out to me at john@johnfbakerlaw.com.

Negotiating with Collectors

The pandemic has been very hard on small businesses, and many won’t survive. Our firm is offering a Covid Escape Plan, which allows business owners to wind-up their operations and close shop. As part of that process, we negotiate with creditors. Creditors can be landlords, vendors, franchisers, and/or banks. The goal is to reduce the liability owed by the business so that the business owner can cease operations without an impact on his or her personal finances.

I think there is a bit of a misconception about how the process of negotiating with creditors works. Many individuals believe that I can make a quick phone call and resolve the bill for pennies on the dollar. Unfortunately, that is never the case. Creditors can be very difficult to work with and rarely offer hefty discounts.

How much of a discount can we expect?

There is no exact figure as to the amount of discount you can expect. I find that it is much easier to negotiate large settlements, as opposed to small ones. For example, it would be much easier to negotiate a settlement for a business that owes $80,000 to their landlord than a business that owes $2,500 to a vendor. I have no idea why this is. I imagine it’s because the amount someone is collecting is a motivating factor towards settlement. If I owe you $80,000 and I offer you $40,000 today, that’s $40,000 in your pocket. You can do a lot with $40,000 so you might be tempted to take that offer. This is especially true when creditors often owe money to other people, which is frequently the case during these trying times.

Compare that to a circumstance where I owe you $2,500, and I offer you $1,250. There probably isn’t much you can do with $1,250 right now. You’re likely to hold out for the full amount because the risk is fairly low given the small amount owed.

Also, consider what a collections firm gets as part of the deal. Collections firms frequently take 33% or more of what they collect. Therefore, my $1,250 is only $825 – not an inspiring settlement.

As a general rule, I usually shoot to get a settlement of around 50% of what is owed. Sometimes you can do better, but it is rare. Normally, bills settle for 25%-50% off. Please understand, that figure may not apply to your business. Every case is different.

I also want to mention that discounts are usually only available when your business is actually struggling. If you’re doing ok but hoping to save some money, creditors can usually see right through that. They may ask for proof of your struggle if they sense you’re not being truthful. Remember, these people are almost never stupid, and, as a rule, I never assume they are.

If you make a reasonable offer and negotiate in good faith, you can usually reach a favorable settlement.

What does the process of settling bills look like?

My process differs depending on the number of bills outstanding. If you owe many different creditors, I usually start the process by sending letters to each creditor with our starting offer. This offer is usually pretty low, and the letter spells out why we’re struggling and how we owe a bunch of people.

If you only owe one creditor or that creditor is a sophisticated negotiator, like an attorney, I will call them. I can usually discuss the issue with them one-on-one and cut through a lot of the bullshit. That’s not to say they will negotiate a lower settlement; it just means that we can reach an agreement slightly faster.

Once I have made my initial offers, we usually have to wait for responses. Frequently, we’re dealing with middlemen who need to take the offer to their client or boss. Some people respond very quickly – say, in a week. But other organizations are extremely slow and can take two to three weeks to respond. Once we have a response, there is usually a bit of a back-and-forth until we reach a reasonable settlement. There is no magic to it. We just put in the time, working to get the creditor down to a number that makes sense to our client.

Once a settlement is reached, we need to prepare releases for each creditor. It is imperative that a release gets signed for each settlement. No checks get sent until the creditor releases our client from liability, in writing. Trust me, it makes everything easier in the end. The process of drafting and sending releases doesn’t take long, but we frequently wait a week or so for signature from the creditor.

The entire process usually takes four to six weeks to complete, depending on the number and reasonableness of creditors.

It also makes life a bit easier if you were current with your collectors prior to the slowdown. I find that people are much more willing to work with businesses that were good partners before the pandemic. If you have been avoiding bills for years, you probably won’t get much sympathy now.