When a business starts running out of cash, owners often focus on the loudest problem first: a demanding vendor, an overdue payroll run, a lender threatening default, or a landlord pushing for payment. That reaction is understandable. But insolvency planning usually gets harder when the next move is driven by pressure alone instead of a clear legal and financial triage process.
In 2025, the U.S. Courts reported that business bankruptcy filings rose to 24,039, continuing the increase seen in prior years, while the SBA’s Office of Advocacy reported that the U.S. has 36.2 million small businesses accounting for nearly 46% of private-sector employment. Those numbers help explain why distressed-business planning matters far beyond a single owner’s balance sheet: employees, vendors, lenders, landlords, and families are often affected too. U.S. Courts SBA Office of Advocacy
This post covers seven insolvency planning mistakes that often narrow a business owner’s choices. If you want a broader framework for timing, vendor pressure, and payroll risk, it may help to start with this overview of how insolvency planning works when cash pressure is building. In this post, you’ll learn where owners commonly lose leverage, what issues tend to appear early, and how legal counsel can help evaluate options before the business is boxed into a single path.
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One of the most damaging mistakes is treating payroll and payroll-tax stress like just another payable problem.
For many owners, the temptation is easy to understand: if revenue is expected next week, it may feel reasonable to bridge the gap by paying net wages now and “catching up” on tax deposits later. But payroll withholdings are different from ordinary trade debt. The IRS explains that withheld income and employment taxes are trust fund taxes, and the Trust Fund Recovery Penalty can be assessed against responsible persons when those amounts are not properly collected, accounted for, and paid. The penalty can equal the unpaid trust fund tax, and the IRS notes that a business does not have to shut down before assessment becomes possible. IRS guidance on employment taxes and TFRP
The IRS also states that “willfully” paying other business expenses instead of employment taxes can create personal exposure for responsible persons, including officers, partners, sole proprietors, and others with authority over company funds. IRS overview of the trust fund recovery penalty
Here’s what this often means in practice: once a company starts using payroll-tax money to cover operations, the issue may move from business distress to potential personal liability analysis. At that point, the owner’s range of choices may narrow quickly. A turnaround, structured wind-down, sale, or bankruptcy strategy can become harder to execute cleanly because the tax problem is now part of the case.
Some owners in similar situations speak with counsel as soon as payroll feels uncertain—not only when payroll is missed. That earlier review can help identify whether a short-term workout is realistic, whether a controlled shutdown is worth exploring, or whether a court-supervised path may preserve more value.