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What happens in an S-Corp when 2 out of 3 partners want out of a failing business with unpaid rent, loans and consultant debt?

San Diego, CA |

An S-Corp business has run out of work, has personally guaranteed bank loans, consultant debt and back rent owed. Two of the three partners want out of the business and are looking at bankruptcy. Remaining partner wants to reorganize the business, keep it going, pay the consultants, pay his share of the bank and rent debt and maintain good credit.

How does the business debt get divided, without filing bankruptcy on behalf of the corp? Must the 2 partners file personal bankruptcy?

In the event the 2 file bankruptcy, are those partners absolved of the bank and rent debt? Does the remaining partner gets stuck with the entire debt? Bank loan has such a clause for collection. Does the bankruptcy collect from the individuals property, new wages, etc. to pay back their share? Thanks.

Attorney Answers 4


  1. Not a bankruptcy lawyer, but I can tell you that outside of BK, each partner is "jointly and severally" liable for the bank debt and probably the rent. This means the creditor can collect the entire amount from any one of the guarantors. To keep it going the one will have to pay all of the debt and try to collect from the other shareholders. If the other two file BK, it is unlikely that there will be much left to "pay back their share." I don't see why the one would want to try to rescue this disaster if it has "run out of work." Consult a good bankruptcy lawyer.
    DISCLAIMER—This answer is for informational purposes only under the AVVO system, its terms and conditions. It discusses general legal principles, trends, and considerations and is not intended as specific legal advice regarding your question. Each state has different laws and the answer could be different if all the facts were known. Full evaluation of your legal situation would require personal consultation permitting an understanding of all the facts and circumstances. This answer does not establish an attorney client relationship.
    (Bryant) Keith Martin
    sbbizlaw.com


  2. These are incredibly complicated and very fact specific questions. I will provide some general guidelines, but please speak with an attorney and do not accept this as legal advice. Again, a good legal answser depends on many more facts.

    First, one should try to negotiate with the bank, the other shareholders, landlord, etc. One should not do anything behind the other shareholders' back. It could cause resentment and threaten the negotiations with creditors. If other shareholders file bankruptcy, a purchase of the business from those bankrupt shareholders could be scrutinized.

    One should look at alternative methods of transferring the business from the bankrupt shareholders. A good tax/bankruptcy attorney should be retained. For instance, if there is IP involved, certain statutes may be invoked through licenses.

    Quick legal disclaimers: This is not legal advice. You definitely need to speak to an attorney. The above answer provides general guidelines. True legal advice can only be provided with more facts. This answer is not privileged through any attorney-client relationship. You are not a prospective client.


  3. If the company is insolvent you and the partners ought to confer with bankruptcy counsel. If you don't, and the others file for the bk protection, you may find your self liable for the entirety of the debt, or partners with a bk trustee. Who will in all likelihood dissolve and liquidate the Corp.

    That said, you may still have liability afterward if there were personal guarantees made.

    All things considered, if the business has some unique properties that are such, that you want to re organize the business you ought to confer with a business planning attorney as soon as possible.

    You should obtain a business valuation, or appraisal on the personal property you will acquire from the old business, as well as the intangible property such as the phone number/goodwill. Consider reorganizing as an llc, be sure to pay fair value for any property, personal, intangible, or otherwise from the new company to the old.

    There is much more to go into that this space will allow. For more info you are welcome to contact me through the avvo site, click on my photo/profile. You will be able to access my website from there.

    You might also check out my legal guide on asset protection, or my article on business succession planning in the July 28th issue of Bar Report available online at www.sdcba.org. Page 3, I have tried to add the link to it below?

    If this was helpful click on the thumbs up tab.

    You will need a lawyer, to assist you.

    This discussion is provided or academic purposes only.


  4. Consultation with an attorney is a good idea. You refer to the business as a corporation and you also refer to partners. Partnerships and corporations have very different rules for dissolution, personal liability, etc. This difference will effect the best advice to offer you and the consequences of any choices you make.

    Best of luck to you.

    This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

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