Bankruptcy Protection In A Limited Liability Corporation

: Chris Lee Law Firm

  Filed under: Chapter 11

Bankruptcy in Limited Liability Corporation
Filing for bankruptcy as a Limited Liability Corporation (LLC) may possess certain challenges than a typical bankruptcy case for other types of corporations. In Chapter 11 bankruptcy cases, the debts of the company are often repaid through a restructuring process. The business may obtain a new loan to stay in operation and allow creditors priority over future earnings to repay the debts. The bankruptcy court may allow for the business’ debts to be repaid through terminating the owners’ rights to the company and handing over the company to creditors. The problem with filing for a bankruptcy in a Limited Liability Corporation is the lack of specific rules pertaining to the company, blurring the lines on how to proceed with the bankruptcy protection.

Structural Differences

In a Limited Liability Corporation, the company may operate with a single owner, under partnership or as corporation. A Limited Liability Corporation with a single owner may be treated like a partnership when filing for bankruptcy, in which the court would dissolve the LLC and the assets would be divided among the creditors.  In this case, the owner would be terminated of all rights to ownership and removed of their stake in the company. If the LLC is handled like a corporation, the owner would be able to choose to relinquish ownership to another party while maintain stock as a shareholder. The structure of the company is the most important for determining how to proceed with a bankruptcy. Because a Limited Liability Corporation can have one, two or multiple owners;  the bankruptcy court must decide how  many members must provide consent for the filing and how many may lose their stake in the company.

Debt Responsibility

Another problem with filing for bankruptcy in a Limited Liability Corporation regards whether the owner(s) are personally responsible for the debts. If the owner(s) are not personally responsible for the debts of the LLC, then filing for bankruptcy may be possible. However, the trouble arises from the fact that very few Limited Liability Corporations are able to obtain lines of credit or loans without a personal guarantee, especially as a new business. A personal guarantee on a business loan links your personal credit history to the account, holding the guarantor responsible for the debts of the loan. Any defaults on the loan or bankruptcy filings will get reported to the owner(s) that guaranteed the loan.  If the business obtained the line of credit using their name and Tax Identification Number, and was not backed by a personal guarantee, the debts will be viewed as business debts and will be treated as such in a bankruptcy.

State Law Variations

Most states have different bankruptcy laws that will determine how the bankruptcy is managed for a particular business.  Before considering filing for bankruptcy as a Limited Liability Corporation, it is best to consult with a professional bankruptcy attorney that can review the details of the business dealings.

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