An LLC bankruptcy is done through either a Chapter 7 liquidation or Chapter 11 reorganization.
What is an LLC Bankruptcy?
When you file for an LLC and bankruptcy, the combination suggests the need for bankruptcy protection, which might provide comfort when your limited liability company can’t pay its bills.
The greatest advantage of an LLC bankruptcy is that it disposes of the company’s assets and settles obligations without shutting it down. Even if you aren’t operating a business, the LLC is considered a legal entity until you formally terminate it.
It’s not an easy task to close down your LLC after bankruptcy. Members, on the other hand, may take advantage of a number of resources to make the change as painless as possible. When the bankruptcy procedure is completed, all LLC members are given a fresh start and allowed to be debt-free.
How an LLC Bankruptcy Works
A company’s assets are sold in order to pay off creditors when a limited liability company files for bankruptcy. When a company is shut down, its obligations are erased. LLC members are usually not responsible for any of the company’s debts unless they have signed personal guarantees making them personally liable for certain business-related liabilities.
Personal guarantees are sometimes required by creditors, including landlords, banks, and other lenders when a firm has little assets or is just getting started. If you have made any personal promises, you will need to file a bankruptcy petition to discharge yourself of your obligations.
Similarly, if you have given personal guarantees and the LLC does not own any assets, bankruptcy is preferable.
In certain situations, submitting a business bankruptcy may be the best course of action for an LLC’s financial issues. You might need to submit both a company and a personal bankruptcy to get back on track on occasion.
Should you Dissolve Your LLC After Bankruptcy
Following bankruptcy, the majority of states continue to recognize an LLC unless specific measures are taken to dissolve it. You are still responsible for the following in each state:
- You must submit yearly LLC reports to the IRS.
- Taxes are being paid in full.
- Fees are paid
Failing to carry out these duties exposes you to fines and penalties.
There are several ways to dissolve an LLC, but doing so formally is the only way to avoid fines, fees, taxes, and other requirements that might be a challenge for a post-bankruptcy firm. Dissolution also informs any remaining creditors that the LLC is no longer able to take on new liabilities.
Sell all physical assets, such as furniture and equipment, once you’ve filed for bankruptcy. You may then use the money to settle obligations like outstanding taxes. Before formally closing the company, it’s critical to get rid of any remaining LLC property.
How to Dissolve Your Limited Liability Company
Each state has its own requirements for dissolving an LLC. The following procedures are often required:
- After your state has confirmed the dissolution, you’ll need to submit dissolution papers to your government.
- Make sure you submit the proper forms and follow your state’s specific rules.
- Documents are completed and submitted. Documents for dissolution may be obtained through the Secretary of State.
- To demonstrate that your LLC is current on its tax debt, you’ll need a certificate from state tax authorities if required by your state.
- Any outstanding creditors should be notified of the LLC’s dissolution.
- If the LLC is registered in other states, submit dissolution paperwork in each state where it is registered to conduct business.
- Notify the IRS that the LLC is closed and request to remove the company’s EIN.
- Complete any remaining tax-related actions as directed by the IRS.
- Contact the registered agent of your LLC to let them know about the corporation’s bankruptcy and dissolution.
- Contact the licensing authorities in your area to let them know you are closing down your business.
What about Outstanding Business Loans?
If you’re cosigning a company loan, you’re equally responsible for the LLC in repaying the debt. In reality, cosigning is one of the simplest ways to make yourself personally liable for the LLC’s obligations.
When your LLC defaults on the loan, creditors may pursue your personal assets because your co-signature is a personal guarantee of the debt. Many company owners cosign loans when it’s first starting out with no significant assets. They might even offer collateral to get the loan approved, putting your house or other personal assets at risk.
When a creditor attempts to seize your personal assets, it is known as “piercing the corporate veil.” The corporate veil is pierced if the credit can show that the LLC was formed solely to shield its proprietors from responsibility.
If a court decides to pierce the corporate veil, it may do so if:
- The firm failed to follow necessary procedures such as conducting board meetings and recording minutes.
- There were excessive controls on the company by LLC members.
- The accountants were able to link the records and figures of individuals who had handled their money in ways they couldn’t comprehend.
- When the LLC was established, it did not have enough cash.
It’s not an easy choice to dissolve your LLC. If you need assistance with LLC or bankruptcy concerns, make sure you do your homework and locate a lawyer who will be able to help you.