LLC Bankruptcy and Its Effect on You: What You Need to Know
If my LLC goes bankrupt, does it affect me? The answer to this question depends on whether you are personally liable for your business' debts.3 min read updated on February 01, 2023
Updated July 14, 2020:
Doing Business as a Sole Proprietorship
As a sole proprietorship, the law views you and your business as one in the same. If you operate a business as a sole proprietorship, you own the business assets personally. This means you are responsible for its debts.
Discharging business debts as a sole proprietor requires that you file personal bankruptcy. Doing so will affect your credit. The bankruptcy will be visible for up to 10 years on your credit report.
Doing Business as a General Partnership
Operating a business as a partnership with you as a general partner makes you personally responsible for the business debts of the partnership.
In this type of business, the assets are owned by the partnership. This means the partnership can file for bankruptcy on its own. If there are remaining debts to be paid after the liquidation of the partnership property, the general partner or partners are still responsible for any remaining unpaid debt.
A creditor can report outstanding debts to the credit bureau(s) under your name. The bankruptcy should not show on your credit report since it was not a personal bankruptcy.
Doing Business as a Limited Partnership, Corporation, or LLC
A corporation and a limited liability company (LLC) are both treated as separate legal entities separate from the owners. As such, the corporation or LLC sets up contracts, owns assets, and is liable for its business debts.
If either the LLC or corporation cannot pay its debts, creditors usually only go after the company's assets and not the owners' personal assets. There are certain situations when the owner of a corporation or LLC is held responsible for the business' debts.
Limited partners in a business, as well as those in a corporation or LLC, are usually not liable for business debts.
Each of these business entities can file for bankruptcy in their own right without affecting the owner's credit. With very few exceptions, the business bankruptcy and the business debts should not be listed on your credit report.
Double check whether you have any accounts, such as credit cards, using your social security number. If there are any accounts with this information, you will likely be held liable for these debts.
Another suggestion is to review the credit card agreements for your accounts. This way, you will know what debts you are personally responsible for and can prepare to pay the debt and protect your credit.
Situations Affecting Personal Credit
There are a few situations when a bankruptcy filed by a corporation, limited partnership, or LLC might affect your personal credit report.
If an LLC has debts in its name, only the credit of the LLC is affected. The exception is if a member of the LLC guarantees the loan. In this case, if the LLC goes bankrupt, the person who guaranteed the loan is responsible for the business debt.
Only the individuals who cosigned or guaranteed the loan are held responsible. The credit of those who did not sign will not be affected.
The business must transmit funds for taxes, whether withholding from an employee's salary or another tax, such as sales tax, to the government. If these funds are not sent to the taxing authority, the owner(s) are personally responsible for this debt. This can result in a tax lien being filed against the owner and recorded in public records.
When putting up collateral to get a loan for your business, you are agreeing that the creditor will have the right to take your property and sell it, if necessary, to satisfy the loan obligation.
Creditors may attempt to pierce the corporate veil by eliminating limited liability protection provided to corporations and LLCs by proving the business was created simply to serve as a shell to provide liability protection for its owners.
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