Running a business is all fun and games until your profits begin to fall. Unfortunately, this is not always something that business owners can predict and it often leads to bankruptcy. In fact, around half of all start-ups fail within the first five years.
There is a risk of bankruptcy with any business. As an entrepreneur, you must accept the fact that failure is possible and it can be caused by factors that are out of your control.
Markets rise and fall, products come in and out of trend, and suppliers can increase their prices. Each of these factors can contribute to significant financial loss and this might lead to the failure of your business.
The terms bankruptcy and insolvency are often used interchangeably, but there are differences between the two.
The term bankrupt refers to when a business is unable to pay its bills. If your profits have been on a downward spiral for the past few months and you are unable to pay your debts, your business becomes insolvent.
This means that businesses that are run by sole traders or partnerships can become bankrupt or insolvent because there is no clear-cut distinction between the business and its owner. In this case, there is a huge cross-over between personal and business finances, so if the business goes bankrupt, so does its owner.
Registering your business as a limited company avoids this cross-over and makes it a much easier process to file for bankruptcy.
So, how do you know when your limited company has become insolvent and what do you do in this scenario?
When Does Your Company Become Insolvent?
A limited company is insolvent if it fulfills one of the following criteria:
- You can’t pay your debts
- Your assets are worth less than your liabilities or loans
- Your assets are worth less than any outstanding payments or unresolved court orders
What Do You Do When Your Business Becomes Insolvent?
Reading the Chapter 13 Bankruptcy Lawyers pages ensures that you know exactly what to do if your business goes bankrupt but here are some of the key steps that you will need to take.
As soon as your company becomes insolvent, you must take immediate action to prevent getting into further debt and adding to your creditor’s losses. This usually involves stopping any trade and seeking financial help as soon as possible.
Failure to do so could mean that you are held personally liable for their losses and debts, and you could be banned from operating as a business director for the foreseeable future.
Filing for bankruptcy does not necessarily mean that it’s the end of the road for your business. You may be able to rescue your company after insolvency and turn things around to become successful once again.
The best thing to do is research your potential options, such as getting a new investor or a sponsor to eventually resume your business operations and generate income once again.