LLC bankruptcy can be confusing as judges may treat it as a partnership or corporation, and taking out business loans can negate personal asset protection. The bankruptcy process depends on how the LLC is treated, and personal assets may be at risk if a personal guarantee was signed. Business owners may need to file for both business and personal bankruptcy, and LLC bankruptcy may not cover payroll taxes.
Declaring bankruptcy for a limited liability company (LLC) can be confusing because there are few solid laws governing the relatively new entity. Some judges may treat this type of company as a partnership, while others may treat it as a corporation. Additionally, many business owners may be surprised to find that taking out business and office loans often negates any protection for their personal assets, meaning their personal assets can be taken during an LLC bankruptcy. The result is that they often have to declare business and personal bankruptcy, but even then they will not be allowed to avoid paying payroll taxes.
One of the deciding factors in the bankruptcy process of an LLC is whether the company is treated as a corporation or a partnership. If the judge presiding over the company’s bankruptcy decides to treat the LLC as a partnership, he will likely dissolve it. In that case, the company’s assets would be distributed among the creditors, and the owner would keep the remaining assets, which are usually few. If the judge treats the LLC as a corporation, he may suggest that the business owner offer an equity stake to someone else. If the owner declined this option, he would be treated as a corporate shareholder because he would retain the shares despite the bankruptcy.
Many business owners wonder if their personal assets are at risk during an LLC bankruptcy. The answer is that although one of the main points of limited liability companies is to protect the owner’s personal credit, it can still be affected when the company is in financial trouble. This is because most lenders ask homeowners to give up their limited liability protection in order to get a small business loan. Additionally, many landlords ask business owners to sign a personal guarantee before renting commercial property, meaning the landlord can fetch the landlord’s personal property if the landlord fails to pay.
Homeowners who never signed a personal guarantee and did not surrender their limited liability protection will likely find that their personal assets are safe when they file for LLC bankruptcy. Most business owners, however, are not part of this group, which means that their personal assets are at risk because of the bankrupt limited liability company. Therefore, they often have to file for business and personal bankruptcy, keeping in mind that the most popular routes such as Chapter 7 and 13 are only available for personal bankruptcy. Also, business owners should be aware that an LLC bankruptcy can pay off their unsecured debts, such as business loans, but still owe payroll taxes.
Asset Smart.
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