LLC and Bankruptcy is a combination that points to the need for bankruptcy protection, which can offer a sense of relief when your limited liability company (LLC) cannot pay its debts. 4 min read updated on November 25, 2020
LLC and Bankruptcy is a combination that points to the need for bankruptcy protection, which can offer a sense of relief when your limited liability company (LLC) cannot pay its debts. The good thing about LLC bankruptcy is that the process eliminates the company's assets and resolves debts without ending the business. Even if not conducting business, the LLC is still a legal entity until you take formal steps to dissolve it.
Shutting down your LLC after bankruptcy isn't an easy decision. However, members can utilize many resources to make the transition a smooth one. Once the bankruptcy-filing process is complete, all LLC members are afforded the opportunity for a fresh start and to be relieved of their debt.
When an LLC files for bankruptcy, the company's assets are sold to pay off creditors. Once this occurs, any remaining debts are wiped clean. LLC members are typically not responsible for any of the company's debts unless they have signed personal guarantees making them responsible for certain business-related debts.
For example, landlords, banks, and other creditors may require personal guarantees when a business has few assets or is just starting out. If you have made any personal guarantees, you may also need to file personal bankruptcy to relieve yourself of those responsibilities. Similarly, if you have made personal guarantees and the LLC doesn't have any assets, a personal bankruptcy is best.
In some cases, filing a business bankruptcy is the best course of action for resolving an LLC's financial problems. Sometimes, you'll need to file both a business and personal bankruptcy to get back on track.
States continue to recognize an LLC following bankruptcy unless formal steps are taken to dissolve the business. Depending on the state, you are still responsible for:
Neglecting these responsibilities leaves you open to fines and penalties.
Formally dissolving the LLC is the only way to avoid fines, fees, taxes, and other requirements that are generally a burden on a post-bankruptcy business. Dissolution also gives any remaining creditors notice that the LLC can no longer incur additional debts.
After filing for bankruptcy, sell all tangible assets such as fixtures and equipment. You can then use the proceeds to pay debts, including outstanding taxes. It is important to dispose of all remaining LLC assets before formally dissolving the company.
Every state has different requirements for dissolving an LLC. In general, you must complete the following steps:
Cosigning a business loan makes you equally responsible for the LLC in repaying the debt. In fact, cosigning is the easiest way to make yourself personally liable for the LLC's debts.
Since your co-signature is a personal guarantee of your debt obligation, creditors may pursue your personal assets when the LLC defaults on the loan. Many business owners cosign loans when the company is new without many assets. They may even offer collateral to approve the loan, which can place your house or other personal assets at risk.
When a creditor goes after your personal assets, the situation is commonly known as “piercing the corporate veil.” The corporate veil is pierced if the credit can prove the LLC was created solely to protect its owners from liability.
A court may choose to pierce the corporate veil if:
Dissolving your LLC isn't an easy decision. If you need help with LLC and bankruptcy issues, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.