LLC and Bankruptcy: Everything You Need to Know
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 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.
How Bankruptcy Works for LLCs
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.
Reasons to Dissolve the LLC After Bankruptcy
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:
- Filing annual LLC reports
- Paying minimum taxes
- Paying fees
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.
How to Dissolve an LLC
Every state has different requirements for dissolving an LLC. In general, you must complete the following steps:
- File dissolution documents with your state after the dissolution is approved.
- Make sure you file your state's specific forms and abide by its dissolution procedures.
- File completed documents. Dissolution documents are available through the Secretary of State.
- If required by your state, get a certification from state tax authorities to show your LLC is current on its tax debt.
- Notify any remaining creditors of the LLC's dissolution.
- If the business is registered in other states, file the dissolution documents in each state where the LLC is registered to conduct business.
- Notify the Internal Revenue Service (IRS) that the LLC is closed and request to cancel the company's Employer Identification Number (EIN).
- Complete other tax-related steps as stipulated by the IRS.
- Notify your LLC's registered agent of the LLC's bankruptcy and dissolution.
- Notify licensing authorities and ask how you can surrender your business license.
What if You've Cosigned a Business Loan?
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:
- The company did not follow certain formalities, such as holding business meetings and keeping minutes.
- Certain LLC members had too much control over the business.
- LLC members used personal funds alongside company funds.
- The LLC did not have sufficient capital when it was formed.
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.