Key Takeaways

  • LLC Bankruptcy Types: LLCs typically file for Chapter 7 bankruptcy, which involves liquidation of assets, or Chapter 11, which focuses on restructuring.
  • Personal Liability: LLC members are generally protected from personal liability, but personal guarantees on debts can pierce the corporate veil.
  • Dissolution After Bankruptcy: Dissolving an LLC formally post-bankruptcy prevents ongoing state obligations and avoids potential penalties.
  • Steps to Dissolve: Includes notifying creditors, settling taxes, and informing the IRS and state authorities.
  • Impact of Co-Signed Loans: Co-signing may expose members to personal liability if the LLC cannot repay its debts.

LC 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.

  • Dissolution eliminates ongoing obligations like:
    • Annual report filings.
    • State-mandated fees and taxes.
  • Reduces risks of future liabilities by formally notifying creditors.
  • Simplifies members' responsibilities, enabling a clean financial slate​.

How to Dissolve an LLC

Every state has different requirements for dissolving an LLC. In general, you must complete the following steps:

  1. File dissolution documents with your state after the dissolution is approved.
  2. Make sure you file your state's specific forms and abide by its dissolution procedures.
  3. File completed documents. Dissolution documents are available through the Secretary of State.
  4. If required by your state, get a certification from state tax authorities to show your LLC is current on its tax debt.
  5. Notify any remaining creditors of the LLC's dissolution.
  6. If the business is registered in other states, file the dissolution documents in each state where the LLC is registered to conduct business.
  7. Notify the Internal Revenue Service (IRS) that the LLC is closed and request to cancel the company's Employer Identification Number (EIN).
  8. Complete other tax-related steps as stipulated by the IRS.
  9. Notify your LLC's registered agent of the LLC's bankruptcy and dissolution.
  10. Notify licensing authorities and ask how you can surrender your business license.

Tips for a Smooth Dissolution Process

  • Organize Documents: Ensure all financial records and tax filings are up to date.
  • Asset Liquidation:
    • Sell all remaining LLC assets.
    • Use proceeds to address debts, prioritizing secured obligations.
  • Tax Clearance: Obtain a tax clearance certificate if required in your state.
  • Consult Legal Assistance: Seek advice for compliance with state and federal laws

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.

How Personal Guarantees Impact LLC Bankruptcy

  • Personal Liability Risks:
    • Members with personal guarantees may need to file personal bankruptcy to resolve liabilities.
    • Creditors may target personal assets like homes or savings.
  • Strategies to Limit Exposure:
    • Avoid commingling personal and LLC funds.
    • Maintain proper LLC records and documentation to preserve liability protections.

FAQ Section

  1. What happens to LLC debts in bankruptcy?
    • Debts are either restructured (Chapter 11) or settled through asset liquidation (Chapter 7).
  2. Are LLC members personally liable for debts?
    • Typically not, unless personal guarantees are involved.
  3. Why should an LLC dissolve after bankruptcy?
    • To avoid ongoing state fees, taxes, and administrative requirements.
  4. Can an LLC continue operating after bankruptcy?
    • Yes, under Chapter 11, but Chapter 7 results in liquidation and closure.
  5. What should I do if I co-signed an LLC loan?
    • Consider consulting a bankruptcy attorney to explore personal bankruptcy or other liability mitigation options.

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.