LLC Bankruptcy Lawyer

A limited liability company (“LLC”) is a specific type of business entity. It can be compared to a corporation.
One of the most important benefits of both LLCs and corporations is that they provide limited liability protection to their owners. If you run your business as a sole proprietorship or general partnership, then business creditors can reach any of your assets, even those that have nothing to do with the business.

However, because corporations and LLCs are separate business entities from their owners, the entities (not the owners) are responsible for the business’s debts, liabilities, and obligations. The liability of the corporation’s shareholders and the LLC’s members is limited to the amount of their investment.

Although they are similar, LLCs and corporations differ in some respects:

1. LLCs have more management flexibility: LLCs can be managed by the members or managers. A board of directors manages corporations. Shareholders do not manage the business and affairs of corporations.
2. Corporations have many more requirements to keep the state happy: For example, corporations must hold an annual shareholders’ meeting, directors’ meetings are required, proper notice must be given and minutes taken, etc. LLC statutes do not have similar requirements. LLCs are favored by small, owner-managed businesses that want flexibility without much corporate formality. Corporations are a good choice for a business seeking outside investment.
3. LLCs allow the owners to split up financial interests: Owners of LLCs can allocate profits and losses disproportionately among owners, while a corporation’s profits and losses must be allocated strictly based on ownership percentage. If multiple LLC owners have different roles in the business, this could be especially beneficial.
4. LLCs offer pass-through income taxation: This means that business income and losses are not taxed at the company level but “pass-through” to the owners and are reported on the individual’s tax returns. This avoids the “double taxation” imposed on corporations, which are taxed at two levels: the corporation and shareholders. Partnerships and sole proprietorships also have pass-through taxation.

What Is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is called liquidation bankruptcy because after the bankruptcy is completed, all of the company’s assets will have been sold off to pay creditors. There are different categories of bankruptcy, all of which are subject to governance under federal law. Some forms of bankruptcy do not liquidate all the assets but rather reorganize the company to become profitable again.

Bankruptcy refers to a legal proceeding that is initiated when a person or business cannot meet their financial obligations. In Chapter 7 bankruptcy, the bankruptcy process legally dissolves “(discharges”) unsecured debts. Once the bankruptcy process has reached completion, an individual or business is no longer held liable for all of the debts they incurred (some debts cannot be discharged, such as child support and taxes). The bankruptcy court enters a discharge order, which releases the company from its debts.

Although the individual or company has a clean financial slate, the bankruptcy will remain on their credit report for up to ten years. This can hurt their financial health, as well as being approved for future loans. Because bankruptcy can have lasting consequences, it should be reserved as a last resort during extreme financial hardship.

One nice feature about filing for bankruptcy is that during the bankruptcy process, the bankruptcy court will issue an automatic stay regarding any collection activities: no more abusive phone calls and letters.

At the beginning of the bankruptcy, the court will appoint a trustee to handle many tasks associated with completing a bankruptcy. Some of the most common examples of bankruptcy trustee responsibilities include:

• Seizing any LLC assets. The trustee takes over management of the company’s assets, in part to protect them from being sold by the debtor as a way to get money out of the company before it goes bankrupt. The trustee finds the value of each one and totals them to know what the company’s total assets are.
• Liquidating any LLC assets. The trustee will sell off as many assets as possible so that debts can be repaid. Unsurprisingly, the trustee will most likely have to sell them for less than they are worth – at times, for pennies on the dollar. This means that after their sale, there will still be debts remaining.
• Collecting a list of all of the creditors and paying creditors from the funds obtained from the liquidated assets

If the LLC assets cannot fully repay all debts, the bankruptcy courts may dissolve or end the company. Dissolving a company involves filing specific paperwork with the same state agency that originally formed the company and ensuring that all company debts have been satisfied as far as possible. It may be necessary to dissolve an LLC against the wishes of its members if the business goes bankrupt and the bankruptcy court orders a dissolution.

What Else Should I Know About Filing for Bankruptcy as an LLC?

An LLC may also file for Chapter 11 bankruptcy instead of Chapter 7. Chapter 11 bankruptcy is a legal process intended to assist companies in eliminating or repaying debts while still receiving bankruptcy protection. It involves filing a plan with the bankruptcy court, which details how the LLC will repay its debt.

In a Chapter 11 bankruptcy, some debts must be repaid in full, and in others, only a percentage will be repaid. An LLC can file for Chapter 11 if the bankruptcy courts are convinced the company can pay its debts. While an LCC is in Chapter 11 proceedings, its assets are not liquidated; as such, the company will continue to operate as if it were not currently in bankruptcy.

Chapter 11 is a type of reorganization bankruptcy and has no limits on the amount of debt that may be reorganized. It is the typical choice for larger businesses seeking to restructure their debt and become profitable again. As the most flexible of all bankruptcy chapters, it is generally more expensive to the debtor in terms of the costs involved with the bankruptcy. The rate of successful Chapter 11 reorganizations is very low.

In a Chapter 11 bankruptcy, there are specific criteria that an LLC must adhere to throughout the bankruptcy process in terms of repayment plans. One example of this would be how the owners of the LLC must make an effort and take the time to negotiate repayment plans with its seven largest creditors. All of this will be overseen by the trustee, who will be looking to see if the LLC is obtaining the best possible negotiated price.

Once the repayment plan is developed, it must obtain final approval from the bankruptcy court before implementing it.

Should I Consult With a Bankruptcy Attorney About LLC Bankruptcy?

If you are involved in an LLC that is facing or considering filing for bankruptcy, you should consult with a skilled and knowledgeable local bankruptcy attorney. Laws governing the bankruptcy process can vary from state to state. As such, an experienced and local bankruptcy attorney will be best suited to inform you of how your state’s laws will affect your case and what legal rights you have.

An experienced attorney will be able to ensure that all required documentation is presented and that the bankruptcy petition is submitted properly. Further, a bankruptcy attorney will then be able to represent you at the required meeting of the creditors if it is a Chapter 7 bankruptcy or in negotiations with creditors if it is Chapter 11.

Finally, an attorney can represent you in court should any disputes arise or if creditors file any objections.