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Liquidity

As businesses in the current environment are looking for ways to conserve or obtain liquidity, we have set forth below some avenues to liquidity, one or more of which might be applicable to your business.

  1. Postpone Tax Distributions for LLCs. If your business is a limited liability company, there are generally tax distributions to members as tax season approaches. The federal government has delayed the deadline for payment of income and estimated income taxes, giving companies extra time to provide their members with appropriate tax distributions. By delaying tax distributions to a limited liability company’s members, the company can use the cash to meet other more immediate business obligations. Companies should seek counsel regarding the tax distribution obligations under the company’s governing documents.
  2. Convert Monthly Real Estate Tax Requirements to Lump Sum Payments. In lease agreements, tenants often agree to pay part of the landlord’s property taxes on a monthly basis. While in normal circumstances this payment is non-controversial, in the current climate the extra payment can be an additional burden on the tenant. While landlords do not need the payments until taxes are due, tenants in the current environment may highly value liquidity. In the current environment, landlords may be willing to forgo these monthly payments to help tenants navigate unchartered territory.
  3. Request Postponement of Audit Requirements from Lenders and Shareholders. Many loan agreements and shareholder agreements require auditors to review a company’s financial statements. While in ordinary circumstances the time and expense involved may be reasonable, the COVID-19 environment may make the additional time and expense of the audit impractical. Companies may seek to postpone compliance with the audit requirements to save the time and monetary resources that would be spent on dealing with an auditor. Companies should seek counsel regarding their audit requirements, including their regulatory requirements for which relief may be available.
  4. Draw Down from Existing Loan Agreements. While companies have already done so in very large numbers over the last several weeks, companies with existing loan agreements can seek to draw down on existing revolvers. In doing so, companies may wish to seek counsel regarding their obligations and the requirements for drawing down more debt under their current loan agreements.
  5. Suspend or Reduce Contributions to 401(k) Plans. Companies facing serious cash flow concerns may consider suspending or reducing contributions to their 401(k) plans. Although terminating a 401(k) plan may have significant drawbacks, such as the inability to cover the same employees under a new plan for 12 months following the plan termination and the requirement of full vesting of all participant account balances, a more desirable option might be to suspend or reduce contributions. Companies are advised to seek assistance from counsel and their plans’ Third Party Administrators (TPAs), if any, for compliance assistance.
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