How Much Debt Protection Do You Really Get From an LLC?

When you were younger and less wise, you started a business, but within five years, it went the way of most new businesses. Creditors came after you, but you could not keep up with the payments after your business venture folded, and you eventually filed for Chapter 7 bankruptcy. That was more than eight years ago, and this time, you have learned your lesson. Your biggest mistake the first time around was checking the wrong business structure box on the IRS form where you applied for a taxpayer ID number for your now-defunct business venture. This time, you have the good sense to incorporate your business as a limited liability company (LLC). “Limited liability” means that if your business cannot pay its debts, it is not your problem. Creditors can huff and puff, but they cannot make you pay your business debts out of your personal funds. At least, they usually cannot. To find out more about protecting yourself from personal liability for debts when you close an LLC, contact an Oakland business bankruptcy lawyer.

Why are Creditors Still Pursuing You, Even Though You are Wearing Your LLC Invisibility Cloak?

Limited liability companies (LLCs) are so-called because, in most cases, the court will not require LLC owners to use their personal funds or assets to pay debts owed by the LLC. This rule applies both in debt collection lawsuits, where a single creditor sues the LLC for repayment of a single debt and in Chapter 7 bankruptcy cases, where the LLC dissolves and liquidates its debts. It is also true in instances of assignment for the benefit of creditors (ABC), which has similar effects to a Chapter 7 bankruptcy case, except that it does not involve the court.

There are some instances, however, where an LLC owner can be personally responsible for paying debts owed in the LLC’s name. A common example is when the LLC owner personally co-signs for a business loan for the LLC. This is a common scenario with businesses that are just starting out. Newly founded businesses do not have enough credit history to qualify for loans in their own right; therefore, the owners often co-sign in the hopes that the business income will be enough for them to keep up with payments on the debt. Sometimes, LLC owners even secure business loans by pledging their personal assets, such as their houses, as collateral for business loans. This puts you in as vulnerable a position as if you had taken out a home equity loan and used it to start a business.

A less common scenario is when the LLC owner would ordinarily be protected from liability, but the creditor asks the court to pierce the corporate veil and hold the LLC owner responsible. This most often happens when the creditor alleges that the LLC owner knowingly made false statements on the loan application.

Contact the Law Office of Melanie Tavare About Dealing With Business Debt

A debt relief lawyer can help you avoid becoming personally liable for business debts. Contact the Law Office of Melanie Tavare in Oakland, California, or call (510)255-4646 for a case evaluation.