Just when you think your ISP operation may be down and on its way out, consider voluntary bankruptcy a potential business cure. While it won't stop the tax man at your door, your ISP could get a second lease on life.

by Mark E. Battersby
[December 14, 2000]

One bad year should not mean the end of any ISP or other online business operation.

Unfortunately, few ISP owners and operators that are facing hard times, reduced cash flow, or pressure from their creditors have ever given any thought to failure. According to many experts, avoiding financial failure requires planning—perhaps even planning to seek protection under our Federal Bankruptcy laws.

Bankruptcy has long been viewed as the end of an ISP—or its owners. However, today's bankruptcy laws have been specifically designed to make it far easier for any troubled ISP owner to use bankruptcy as a staging area for survival and future growth. In other words, bankruptcy need not be the end of your ISP operation.

Willing or unwilling
Although the days of debtor prisons and deportation are long past, Federal legislation passed in 1918 and subsequently revised in 1938 and 1978, provides for an orderly handling of bankruptcies by the Federal court system.

Even if the more restrictive rules currently being considered by our lawmakers become a legal reality, bankruptcy procedures will still permit any individual or business to get a fresh start—if the ISP operator is smart enough to opt for a voluntary bankruptcy.

On the other hand, if your ISPs creditors force you into an involuntary bankruptcy, it all-too-often involves selling off the assets of the operation in order to pay nervous creditors.

With voluntary bankruptcy, an individual or firm asks to be judged bankrupt because of an inability to pay off creditors. Under involuntary bankruptcy, the creditors may request the courts to judge a business or individual bankrupt and the assets disposed of to pay all outstanding debts.

Imagine being able to hide behind the protection of the Federal courts while your ISP business is restructured. You have time to make a plan to pay off debts (even at a rate as low as ten cents on the dollar) and a safe haven where creditors can't intrude, harass, interfere, or close your business down. Bankruptcy may be just the financial shield many troubled ISP owners and operators need.

Carry some protection
Whatever protection against liability and creditors that might have existed when your ISP operation was first incorporated, can usually be nibbled away by hungry creditors. The companies your ISP owes are anxious to prove that since the incorporated business was not operated as a separate entity, the owner/shareholder is liable for all the debts which the incorporated entity cannot pay.

If incorporation at the outset of your ISP operation is not the answer to protecting its assets—and those of its owners—what is? James A. Sweet, an attorney specializing in small business bankruptcies in Philadelphia, PA, said the answer lies in financing.

"Financing requires some thought," Sweet said, "at least if any future bankruptcy is to leave the owners with a business or any personal resources".

Lenders willing to loan money to any small business without a personal guarantee from the owner are far and few between—particularly if your business is a newly formed Internet service. In other words, our lawmakers, the tax authorities at every level, the Federal courts and the ISP operator may believe in the separation of an incorporated business and its shareholders, but bankers and other lenders do not.

Blood from a stone
Every ISP operator needs to understand that from your first day in business forward, taxes are inevitable—and government takes the biggest bite from impoverished businesses. A financially troubled ISP may often have debts forgiven or written off by its creditors. Unfortunately, our tax laws consider forgiven debt to be taxable income.

That's right, even when a creditor forgives a debt, the ISP/debtor is treated by the Internal Revenue Service as if the business had received income equal to the amount of the forgiven debt—and taxes will be assessed. The only exceptions to this rule are when the business operation is insolvent or when the entity is in bankruptcy.

Roll with it
Despite advance planning, intricate tax strategies, and the best legal advice available, bankruptcy may be unavoidable. Should it ever come to that point for your ISP business, it is far better to view voluntary bankruptcy as a new beginning, rather than the end of your entrepreneurial dreams.

An ISP owner or operator who places his or her business in voluntary bankruptcy may not only retain his or her personal assets and finances—but the owner may soon find themselves with a newly revitalized, less debt-burdened ISP business poised for growth and a long prosperous future.

Bankruptcy should be viewed as a tool for the survival—not the end of the line for your ISP business.

— End    

Related articles:
	[Dec. 7, 2000]	The Tax Man Cometh
	[Nov. 22, 2000]	Exit Your ISP Your Way