If your LLC fails, you may choose to file for bankruptcy. While this offers some level of protection, an LLC bankruptcy filing only protects personal assets against creditors, meaning business assets are not immune to liability. It’s important to understand which assets aren’t protected in the event of an LLC bankruptcy filing.
What is a LLC?
An LLC is a business structure that allows you to start and run your own business while protecting your personal property and individual assets. If you own a Limited Liability Corporation, liabilities are limited, as the name implies, but they still exist. If your company is sued or goes bankrupt, your personal property cannot be seized. However, your LLC’s assets can be targeted if you are ordered to pay restitution or fines.
What are the types of LLC bankruptcy?
LLCs can file for one of two types of bankruptcy. Chapter 7 bankruptcy means the business will no longer continue, and all debts are settled by liquidating assets. Chapter 11 bankruptcy allows a business a longer amount of time to pay off debts while they continue to operate and reorganize.
While an LLC typically protects personal assets during an LLC bankruptcy filing, there are several scenarios in which you may be personally liable for your LLC’s debt:
- Personal guarantees: If you provided a legal promise, or personal guarantee, for your business debt, you are personally liable to creditors.
- Credit card debt: If you use your personal credit card to make purchases for the business, you are still liable for the debt due.
- Legal obligations: As an LLC owner, there are some debts that you will always be liable for, including unpaid employment, payroll tax, and sales tax.
Personal debts don’t go away
Filing bankruptcy as a limited liability company is not the same thing as filing personal bankruptcy. The idea behind personal bankruptcy is to forgive all of your debt. Filing bankruptcy through an LLC you own will only resolve business debts, not personal ones. For example, if someone files for bankruptcy on their LLC and they still owe money on their personal car, they would still need to finish paying off their car loan.
Personal bankruptcy doesn’t limit LLC liability
Filing for personal bankruptcy may put your business assets in jeopardy. While personal items can’t be seized or levied because of business bankruptcy, personal bankruptcy can result in the seizure of your business assets. Assets that are not protected by the LLC will go through a liquidation process in order to repay creditors.