Bankruptcy is a legal process whereby the business owner seeks protection from creditors by using the federal government and an assigned trustee to either liquidate or reorganize the business. There are two forms of business bankruptcy, Chapter 7 (Liquidation) and Chapter 11 (Reorganization).
Insolvency refers to the ability to pay bills in a timely manner. It does not mean bankruptcy but long-term insolvency is a underlying factor of bankruptcy. Many owners and/or managers of small business have no idea of how to determine if the company is insolvent or headed towards the inability to meet their day to day obligations.
One of the liquidity ratios used in business is the cash ratio. It is a much more effective tool for small business than the traditional current or quick ratio. Although the cash ratio is more difficult to manipulate in small business, most entrepreneurs miscalculate the result
Negative basis in business refers to the value of the equity investment in the company. It literally means you have no actual equity investment and worse you owe somebody money because other parties have fronted the necessary capital to make the business viable.
If you received a 1099-C, the first question you ask is: ‘Do I have to include this in my taxable income?’ Well, the answer is ‘it depends’. Not what you want to hear but there are a lot of variables involved in answering this question.
Every business owner needs to know the difference between insolvency and bankruptcy. Often these two terms are misunderstood and improperly used in conversation. You need to know their correct meaning because both are used in civil law and both have different issues to address during the process. In addition, understanding these two terms builds a better comprehensive understanding of financing your business.
