When your business runs out of money, the order of your next moves matters more than their speed: confirm whether you’re actually insolvent, lock down the areas where you can be held personally liable, pay your employees what the law requires, and only then choose among emergency funding, creditor negotiation, bankruptcy, or formal dissolution. Rushing past any of these steps is how owners end up owing money personally on debts they thought belonged to the company.
First, Find Out Where You Actually Stand
Before you make a single call to a lender or creditor, get an honest picture of the numbers. Pull a current balance sheet with fair market values, an accounts receivable aging report that separates collectible invoices from the wishful ones, and a debt schedule that splits secured debts (loans backed by equipment or real estate) from unsecured ones (credit cards, utilities, unpaid vendor invoices).
Two tests tell you whether the business is legally insolvent. The balance sheet test asks whether total liabilities exceed total asset value. The cash flow test asks whether the business can pay its bills as they come due. Failing either one changes your legal position. Your duties as an owner or director shift from serving shareholders to protecting creditors, and continuing to operate as if nothing has changed can expose you personally.
Where You Can Be Held Personally Liable
A corporation or LLC is supposed to shield your personal assets from business debts. That shield has limits, and running out of money is exactly when those limits get tested.
Personal Guarantees
Most small business loans and commercial leases require a personal guarantee from the owner. When the business can’t pay, the lender comes after you individually, and a judgment based on a personal guarantee lets creditors pursue your home, savings, and investment accounts. If you signed one, the corporate structure will not protect you from that debt.
Unpaid Payroll Taxes
This is where owners most often get blindsided. The income, Social Security, and Medicare taxes you withhold from employee paychecks are considered held in trust for the federal government. If you use those funds to pay rent or suppliers instead, the IRS can assess a Trust Fund Recovery Penalty against you personally, equal to 100% of the unpaid taxes.1Office of the Law Revision Counsel. 26 US Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax The IRS defines “responsible person” broadly: officers, directors, shareholders with authority over funds, and even employees who decide which creditors get paid can qualify. You don’t need bad intent. Knowing the taxes were due and choosing to pay other bills instead is enough.2Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
Piercing the Corporate Veil
Creditors can sometimes reach through the corporate entity and hold owners personally liable even without a personal guarantee. Courts look at whether the business was treated as genuinely separate from its owners. Commingling personal and business funds, skipping corporate formalities like annual meetings and proper records, and transferring business assets to yourself when creditors are circling all raise the risk. Any movement of assets to owners or favored creditors while the business is in distress is exactly the kind of behavior that invites a court to disregard the entity’s protections.
Pay Your Employees Correctly Before You Do Anything Else
Employees aren’t just another line on the debt schedule. Federal and state laws impose specific obligations, and the penalties for getting them wrong are steep.
Final Paychecks
Federal law does not require you to hand employees their final paycheck on the spot, but many states do, sometimes on the last day of work. Regardless of state law, you must pay all earned wages no later than the next regular payday. The Department of Labor’s Wage and Hour Division handles complaints from employees who aren’t paid on time.3U.S. Department of Labor. Last Paycheck
WARN Act Notice
If your business employs 100 or more full-time workers (or 100 or more employees who together work at least 4,000 hours per week), the federal Worker Adjustment and Retraining Notification Act likely applies. A plant closing that displaces 50 or more employees, or a mass layoff meeting certain thresholds, triggers a requirement to give affected workers at least 60 calendar days’ advance written notice.4eCFR. Part 639 Worker Adjustment and Retraining Notification
Violating the WARN Act is expensive. An employer that fails to give required notice owes each affected employee back pay and benefits for every day of the violation, up to 60 days. Failing to notify the local government carries an additional civil penalty of up to $500 per day. Many states have their own versions of WARN with lower employee thresholds, so a business with fewer than 100 workers should not assume it is automatically exempt.5U.S. Department of Labor. WARN Advisor
If the Business Can Still Be Saved: Emergency Funding
If the business has a real path forward and just needs cash to bridge a gap, a few options exist. None are free, and some carry serious strings.
SBA Loans
The Small Business Administration offers Economic Injury Disaster Loans to businesses in areas covered by a federal disaster declaration. These loans cover operating expenses the business could have met if the disaster hadn’t occurred.6U.S. Small Business Administration. Economic Injury Disaster Loans The important limit: your cash crunch must be tied to a declared disaster. A business that simply overspent or lost a major client won’t qualify.
SBA 7(a) loans, the agency’s general-purpose small business loan program, are available regardless of disaster status but require you to apply through a participating lender. Expect to provide prior tax returns, financial statements, ownership information, and business licenses. These go through standard underwriting, so a business already in crisis may struggle to qualify.
Merchant Cash Advances
A merchant cash advance is not technically a loan. A provider buys a share of your future credit card sales at a discount, giving you a lump sum now in exchange for a percentage of daily receipts until the advance is repaid. Providers care primarily about recent sales volume, typically the last six months of credit card processing statements. Cost is expressed as a factor rate rather than an interest rate: a factor rate of 1.3 on a $50,000 advance means you repay $65,000 total. These products are fast and accessible, but the effective annual cost can be extremely high, and daily withdrawals from your revenue stream can accelerate the cash flow problem you’re trying to solve.
Private Bridge Loans
Short-term bridge loans from private lenders typically require collateral, usually a first or second lien on commercial real estate or high-value equipment. Lenders expect a clear repayment plan showing how the business will stabilize within six to twelve months. Bridge loans are designed to cover a specific, temporary gap, not to prop up a fundamentally unprofitable operation.
If You Need to Cut Debt: Negotiating With Creditors
When borrowing more money isn’t realistic, negotiating with the creditors you already owe is often the most practical path. Creditors have a financial reason to talk: 50 cents on the dollar now beats nothing after a bankruptcy that drags out for months.
Lump-Sum Settlements
A composition agreement is a formal deal where a creditor accepts less than the full balance to close the account. Settlements typically land between 30% and 60% of the original debt, though results vary widely depending on what the creditor thinks they’d recover otherwise. Start your offer low to leave room to move up. Before you pay a dime, get the settlement in writing, including a clear statement that the creditor considers the debt fully resolved. A verbal agreement has no teeth if a collection agency later picks up the account.
Extended Payment Plans
If you can’t pull together a lump sum, an extension agreement stretches the full balance over a longer period, often 24 to 36 months, sometimes with reduced interest. Both approaches require you to open your books. Creditors will want recent profit and loss statements and a list of your assets to confirm the deal reflects your actual ability to pay. A creditor who suspects you’re hiding assets will reject the offer and pursue more aggressive collection. Once any agreement is reached, put it in a signed contract that spells out default consequences.
The Tax Bill on Forgiven Debt
Here’s the part that catches people off guard: forgiven debt is generally treated as income. If a creditor agrees to settle a $100,000 debt for $40,000, the remaining $60,000 may be taxable. Any creditor that cancels $600 or more of debt is required to report it to the IRS on Form 1099-C.7Internal Revenue Service. About Form 1099-C, Cancellation of Debt
There’s a significant exception for insolvent businesses. If your total liabilities exceeded the fair market value of your total assets immediately before the cancellation, you can exclude the forgiven amount from income, up to the amount by which you were insolvent. If you were insolvent by $80,000 and $60,000 of debt was forgiven, none of it counts as income. If you were only insolvent by $45,000, you’d exclude $45,000 and owe tax on the remaining $15,000.8Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments
Claiming the exclusion requires filing IRS Form 982 with your tax return. The trade-off is that excluding canceled debt reduces your tax attributes, so you may lose net operating loss carryovers, capital loss carryovers, or basis in your assets. The IRS is essentially letting you skip the tax bill now while clawing back the benefit over time. If the business had any significant assets or losses when the debt was forgiven, working through Form 982 with a tax professional is worth the cost.9Taxpayer Advocate Service. I Have a Cancellation of Debt or Form 1099-C
If Debt Is Too Large: Bankruptcy
When negotiation fails or the debt load is simply too big, bankruptcy provides a structured legal process. The right chapter depends on whether you’re shutting down or trying to keep operating.
Chapter 7 Liquidation
Chapter 7 is a wind-down. You file a voluntary petition in the federal bankruptcy court where the business is located. The filing fee is $338.10US Bankruptcy Court, Northern District of Ohio. Filing Fees The moment the petition is filed, an automatic stay kicks in, halting all collection activity, lawsuits, and creditor contact.11Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay A court-appointed trustee takes control of the business assets, sells them, and distributes the proceeds to creditors in order of priority.
Chapter 11 Reorganization
Chapter 11 lets the business keep operating while it proposes a plan to restructure its debts. The filing fee is $1,738.10US Bankruptcy Court, Northern District of Ohio. Filing Fees The business becomes a “debtor in possession,” meaning owners continue running day-to-day operations under court oversight. Traditional Chapter 11 is expensive and complex. Legal and administrative fees regularly run into six figures, and the process can take over a year. For large businesses with complicated creditor structures, it’s sometimes the only realistic option. For smaller businesses, there’s a better alternative.
Subchapter V for Small Businesses
Subchapter V, added to the Bankruptcy Code in 2019, was built for small businesses that need Chapter 11’s reorganization tools without the cost and complexity. To qualify, the business must have no more than $3,424,000 in total noncontingent, liquidated debts (secured and unsecured, excluding debts owed to insiders). Subchapter V eliminates the creditors’ committee, which alone saves significant legal fees. The debtor proposes a plan within 90 days, and the court can confirm that plan over creditor objections as long as projected disposable income over three to five years goes toward paying creditors.12Office of the Law Revision Counsel. 11 USC 1191 – Confirmation of Plan Owners can keep their equity in the business, something traditional Chapter 11 typically doesn’t allow when creditors aren’t paid in full. For most small businesses weighing reorganization, Subchapter V is the starting point of the conversation.
What Every Bankruptcy Chapter Requires
Whichever chapter you file under, you must submit detailed schedules of assets, liabilities, income, expenses, and a statement of financial affairs. A meeting of creditors (the 341 meeting) is held where the business owner testifies under oath about the company’s financial history. Accuracy matters enormously. Concealing assets, making false statements, or destroying records in connection with a bankruptcy case is a federal crime carrying up to five years in prison.13Office of the Law Revision Counsel. 18 US Code 152 – Concealment of Assets; False Oaths and Claims; Bribery
If You’re Closing for Good: Formal Dissolution
If the decision is to shut down entirely outside of bankruptcy, dissolving the legal entity involves several steps across state and federal agencies. Skipping any of them can leave you exposed to ongoing tax obligations or creditor claims you thought were closed.
State Dissolution Filing
Corporations and LLCs must file Articles of Dissolution (sometimes called a Certificate of Dissolution or Certificate of Cancellation) with the Secretary of State. Filing fees vary by state, generally $50 to $150. Directors or members must authorize the dissolution through a formal vote recorded in the company minutes. Once filed, the entity enters a winding-up period where its only purpose is to liquidate assets, pay debts, and distribute any remainder to owners.
You’re also legally required to send written notice to all known creditors and claimants. That notice must include a deadline for submitting claims, typically at least 120 days from the date of the letter. Claims not submitted by the deadline may be legally barred, which protects you when distributing whatever assets remain.
Federal Tax Account Closure
Corporations must file IRS Form 966 within 30 days of adopting a resolution to dissolve or liquidate.14Internal Revenue Service. Form 966 – Corporate Dissolution or Liquidation If the dissolution plan is later amended, you need to file an updated Form 966 within 30 days of the amendment.
To close your IRS business account and cancel your Employer Identification Number, send a letter to the IRS with the business’s legal name, EIN, address, and reason for closing. Include a copy of the EIN assignment notice if you still have it. The IRS will not close the account until all required returns have been filed and all taxes have been paid.15Internal Revenue Service. Closing a Business Most states also require final state tax returns, cancellation of sales tax permits, and closure of state employer withholding accounts. Leaving any of these open can result in filing obligations and penalties even after the business is functionally dead.
Keep Your Records
Whichever path you take, hold on to your business records. The IRS requires you to retain tax records for at least three years after the final return, and longer in certain situations. If you file a claim for a bad debt deduction or loss from worthless securities, the retention period stretches to seven years. Employment tax records must be kept for at least four years after the tax was due or paid, whichever is later. If you never filed a required return, there is no expiration on the retention requirement.16Internal Revenue Service. How Long Should I Keep Records