It’s never a happy day when a business has to declare bankruptcy — but it’s not terribly uncommon. And for some entrepreneurs, declaring LLC bankruptcy can actually be a constructive way to get relief from debts and start fresh.
But exactly what are your bankruptcy options for a limited liability company? And how do you wrap things up after declaring bankruptcy? In this guide, we’ll walk you through the basics of dissolving an LLC after bankruptcy so you can smoothly move on to whatever’s next.
The two most common bankruptcy options for LLCs include Chapter 7 bankruptcy and Chapter 11 bankruptcy. Of the two, Chapter 7 is a bit simpler — and more final. Under Chapter 7, the court appoints a bankruptcy trustee to handle the case. The trustee then handles the liquidation of the LLC’s assets, using the money from the sales to pay back some or all of the business debts. After the assets are liquidated, the business ceases to exist.
A Chapter 11 bankruptcy petition works a bit differently, as the LLC owner stays in possession of their business, and the business stays open. Instead of liquidating everything, a plan to reorganize the business is created. Creditors get to vote on the plan. If it’s approved, the LLC can get some relief from its debts but still stay open. Likely, you’ll repay your debts over a different period of time than the original plan.
If you pursue Chapter 11 bankruptcy, you won’t have to dissolve your LLC. But if you use Chapter 7 bankruptcy you’ll have to dissolve your business. Small businesses sometimes have a few different bankruptcy options under Chapter 11. If you’re not sure how this process will work, we recommend consulting with a bankruptcy attorney for advice.
Note: keep in mind that the Chapter 13 bankruptcy code is reserved for personal bankruptcy. While sole proprietorships and partnerships might pursue it, Chapter 13 is not an option for LLCs.
Even though bankruptcy effectively stops your business, it doesn’t actually stop your LLC from existing as a legal entity. Unless you formally dissolve your LLC with your state, you’ll still have an LLC on the record. Dissolution is the process that officially shuts down your LLC and takes it off the state record.
As long as your LLC still exists, you can incur ongoing tax liabilities (including expectations to file income tax returns and state franchise taxes), annual report fees, and more. You will have to dissolve your LLC to avoid those fees. Filing for dissolution also notifies any remaining creditors that your business has closed and can’t pay any more debts.
Every state has slightly different procedures for dissolving an LLC, but the general process is the same. You can find a full walkthrough of the process in our dissolution guide, but here’s a general look at the process:
If you’re dissolving because of business bankruptcy, these steps might vary a little bit. But that’s a quick glimpse at the process.
In addition to paying any remaining taxes, the IRS advises you to also take care of the following:
Dissolving an LLC can be a tough chapter of your story, but it doesn’t have to be the end. When you’re ready to start fresh with a new business venture, ZenBusiness has your back. We can help you start a brand-new LLC for $0. And we’ll support you at every step of your journey with tools like annual report services, worry-free compliance, registered agent service, and more.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
If you dissolve without completing a bankruptcy filing, you’ll need to liquidate assets to pay any remaining debts you have. If you file for bankruptcy first, your debts will be taken care of as part of the bankruptcy process. Your case trustee will handle the liquidation of your non-exempt assets, and any remaining debts won’t be held against you personally as you dissolve.
Generally speaking, LLC bankruptcy doesn’t affect the owner because the LLC is a separate legal entity. That personal asset protection is a large part of why many entrepreneurs create LLCs to begin with. The LLC is liable for its own debts, giving a sort of built-in bankruptcy protection for the owner.
That said, if one of the owners signs a personal guarantee for a business debt, it becomes a personal debt for the owner, too. The owner is personally liable for that debt. They might even have to file for personal bankruptcy if they can’t pay the debt.
It depends on what type of bankruptcy the business filed. If the business filed for Chapter 11 bankruptcy, then the business will stay open, under close supervision of its bankruptcy trustee. But if the LLC files Chapter 7 bankruptcy, the business will need to dissolve.
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