Untangling the Complexities of LLCs and Bankruptcy

The thought of declaring bankruptcy can be daunting — especially if you own an LLC. You’ve worked hard to build something great, only to have to potentially dissolve your business if you have to declare personal bankruptcy. Knowing the possible repercussions of LLC and bankruptcy can help you make informed decisions that can protect your business and yourself.

What is an LLC?

An LLC, or limited liability company, is a business structure that offers limited liability to its owners. This means that, in the event that legal action or debt obligations are taken against the LLC, its owners’ personal assets will be protected to a certain extent. If the LLC has multiple owners, these owners are known as members and the LLC itself is a separate legal entity from its members, meaning their personal assets are generally protected from legal action.

How Does Bankruptcy Affect an LLC?

Declaring bankruptcy can have a variety of effects on business owners that depend on the type of bankruptcy they file. Generally speaking, the bankruptcy will affect you and the LLC separately. If you declare a Chapter 7 bankruptcy, the LLC itself is not affected. However, creditors may seek to collect debt payments from the LLC as well as from you as the business owner.

If you file a Chapter 13 bankruptcy, the LLC is also required to follow bankruptcy guidelines. If you are responsible for repaying the debt from your personal income, the LLC will be protected from creditors collecting payments from it. However, if a creditor seeks to collect from the LLC, the court may force the members of the LLC to contribute to the repayment plan.

It’s important to remember that if you file for personal bankruptcy when running an LLC, you will be personally liable for any debts the business incurs. This means that creditors may still come after your personal assets even though you’re filing bankruptcy. It’s also important to note that depending on the state laws, you may be personally liable for debts even if you’re not the owner of the LLC, so it’s important to be aware of these laws when forming an LLC.

FAQs

What happens to my LLC if I declare personal bankruptcy?

It depends on which type of bankruptcy you file. If you file a Chapter 7 bankruptcy, the LLC itself is not affected and creditors may seek to collect debt payments from you as the business owner as well as from the LLC. If you file a Chapter 13 bankruptcy, the LLC is also required to follow bankruptcy guidelines, and a creditor may force the members of the LLC to contribute to the repayment plan.

Will my LLC be liable for my debts if I declare bankruptcy?

Yes, you may still be personally liable for any debts the business incurs if you file for personal bankruptcy. Also, depending on the state laws, you may be personally liable for debts even if you’re not the owner of the LLC.

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