Hello Finance Manager! How can I collect from a closed business?
Hello Finance Manager! I provide marketing services to start-up businesses. About two years ago, I was providing marketing services for a start-up, and after three months of no payment, I obviously stopped marketing efforts. I made a couple of calls to try and collect what they owed to me. I found out on the last call, around September of last year, that they had gone out of business. They haven’t filed for bankruptcy, and I don’t know if they will or not. How can I collect what is owed to me from this closed business?
Thanks for writing. It can really be frustrated to not get paid for the work that you do. It’s even more frustrating to think that you won’t ever get paid because the company shut its doors. Here are some tips that you can use to try and collect on the debt.
Determine the Collectability
So, the first thing you need to do is determine if you can collect on the debt. When people start a business, as we’re sure you know, they often enter into a legal business entity. When people decide they are no longer in business, they often dissolve that entity. The reason people enter into these legal formations is to limit their personal liability.
If a man named Joe was just doing business as Joe’s Lawn Care and he had not legally formed his business, then he would have substantial personal liability for business debts. However, if Joe followed the steps in his state to become a corporation, LLC, LP, LLP, or any other legal business form, he would not carry as much personal liability for business debts.
So, to determine if the start-up you worked with has personal liability for business debts, you’ll want to check with the Secretary of State where their business was registered. The goal is to find out how the business was structured (or if they were a DBA). From there, you can also determine if they legally dissolved the business or just shut their doors.
You’ll have an easier time collecting if the business had assets or if it turns out that the owners had some sort of personal liability because of the formation of the business.
Check Out Your Fee Agreement
After you’ve determined the type of business, pull out your fee agreement and look at it. Is there anywhere in your fee agreement where you’ve mentioned that they will be personally liable for their business debt? If so, then you may be able to file a small claims case. Whether or not you want to file a small claims case will depend on the amount that they owe you and whether it is worth the court fees and the time that you would take to go to court.
Train Your Clients to Pay
It sounds like you don’t end up with a lot of delinquent accounts on your hands, and we commend you for that! However, some people who read this may have noticed a pattern of increased delinquent accounts. So, that’s why we’ve included this section.
You can and should train your clients to pay on time. We posted three steps to help business owners train their clients. Make sure that you check that out, too.
Get Professional Collections Assistance
If you’ve come to the conclusion that the debt is collectable, think about getting professional collections help. It is more affordable than you think. It also frees up your time and allows you to continue to focus on growing your business.
Don’t forget to contact us to get your free process review. We’d love to help you with your needs!