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An LLC does not offer absolute personal protection from debt

On Behalf of | Mar 4, 2023 | Business Bankruptcy

Those who create a limited liability company (LLC) for a business ordinarily do so for personal protection and flexible taxation opportunities. Members of an LLC have more protection from the risk of personal liability for business matters than owner(s) of sole proprietorships and partnerships.

The separation created by establishing an LLC allows a business owner to avoid significant personal financial or legal responsibility for issues related to the business. As such, the owner’s assets or future income aren’t usually at risk if anyone sues the business, and creditors usually can’t hold them responsible for the business’s debts.

However, creditors often become quite aggressive when a business closes and will do whatever it takes to secure repayment. As a result, filing for Chapter 7 bankruptcy as part of the organizational dissolution process may be a very smart move for a sole member/owner who is planning to close an LLC.

Creditors could ask the court to pierce the corporate veil

There are many variables in play when a business closes without fully resolving its debts. Frequently, creditors can demand repayment by pursuing company assets. Creditors that don’t receive payment might seek to hold the business owner personally responsible.

In a variety of circumstances, they can ask the court to pierce the corporate veil. Essentially, due to some kind of misconduct, plaintiffs can ask the courts to hold an individual directly responsible for the obligations of an organization. Simple paperwork and accounting errors might put someone at risk of the courts agreeing to such an effort if they close a business with large debts outstanding.

In a Chapter 7 filing, the trustee appointed by the courts will sell off or liquidate certain business assets, which will then lead to partial repayment of certain financial obligations. By pursuing a Chapter 7 bankruptcy that will discharge remaining debts at the end of the process, the business owner can prevent unsecured creditors from pursuing lawsuits against them or the organization related to discharged debt.

Liquidation bankruptcy can also benefit a business for other reasons

Chapter 7 bankruptcy can lead to a relatively quick and simple process for selling off resources and preparing for the final dissolution of an organization. Especially when a business has substantial debt, preparing for Chapter 7 bankruptcy can be quite a challenge.

Bringing in professional support can help entrepreneurs and business owners make the most of a Chapter 7 bankruptcy filing. That guidance can also lend itself to streamlining the rest of the winddown process as well.