Taking Money From Your Failing Business
Many people seeking asset protection of their personal assets are self-employed and support themselves with salary and distributions from their own business Many of these self-employed individuals have concluded that their business cannot survive and are resigned to winding down and closing their business. The owner is concerned about personal liability because he and or his spouse personally guaranteed business debt.
A very common question is whether the business owner can pay himself from the business even though his business will not be able to pay his creditors. I have seen recently several court cases dealing with debtors who paid themselves salary and distributions from a failing business. In my opinion the general answer is one of common sense.
A business owner may pay himself a reasonable salary for operating his business even though his business is in financial difficulty and may not pay business debts. The salary must be reasonable and comparable what the business would pay an unrelated employee for the same work. You cannot increase salary to deplete the business bank account prior closing the business and defaulting on business debt. The business owner should consider decreasing his personal compensation as business revenues decline to show good faith toward his creditors..
Unfortunately, many business owners give into the impulse to grab all the money they can for themselves before the business closes. I find that some times the motive is greed, and some times the motive is financial survival after the business revenue flow stops. Whatever the explanation, if you drain money from your insolvent business you may cause recipients of the money to become defendants in fraudulent transfer lawsuits and you may jeopardize your ability to discharge personal debts in bankruptcy should bankruptcy become necessary.
Here are few examples of things not to do fi your business is in financial trouble. All examples come from my own client’s proposals or actual activities. You cannot drain business dollars to pay back loans you made to start the business (improper preference); you cannot use business assets to pay inflated salary or other compensation to family members as employees or consultants (fraudulent transfer); you cannot use business funds to make gifts to children or large retirement contributions because you had always done so in the good years (fraudulent transfer to insiders); and you cannot cash checks from the business accounts and stuff the cash under the mattress( there are bank records and creditors are not that dumb).
Basically, be fair to both yourself and business creditors. Don’t use your position as business owner to drain business funds into your own account or your family’s accounts.
