When you created your LLC, you likely did so in the hope of protecting yourself from personal and financial liability related to your business operations. Provided that you avoid commingling and other major mistakes or misdeeds, the incorporation of your business protects you from personal responsibility for defective products or debts incurred by the business.
Most people don’t need those protections because their business is a source of income rather than a liability. However, some businesses fail, leading their founders to dissolve them and try to find a way to fulfill their obligations despite having limited revenue and resources.
If you have determined that it is time to close your business due to financial insolvency, filing for bankruptcy is part of that process could give you an additional degree of protection.
Creditors could ask the courts to come after your assets
The formation of an LLC separates the business from you as an individual and thereby protects your assets from claims by creditors or those who bring legal action against the business. However, it is possible for people or businesses to ask the courts to pierce the corporate veil.
In cases where they allege serious misconduct, creditors and those with judgments against a business may be able to take legal action against the business’s owner. Such legal actions could endanger the future income and personal assets of the business owner.
Little mistakes, like paying for your first month’s storefront rent out of your personal checking account could constitute commingling and make your personal assets vulnerable to such claims. Filing bankruptcy on behalf of your business eliminates unsecured debts and reduces the risk of creditor claims after you close down the company.
Chapter 7 bankruptcy can help you close your business
In Chapter 7 or liquidation bankruptcy, the entity filing will need to report its assets and liabilities to the courts. It will be necessary to liquidate or sell any non-exempt assets to attempt to repay creditors. After selling off business assets and using the proceeds to pay your creditors based on the priority of their debts, you can then receive a discharge of the remaining balances.
The business and you as an individual will not have the responsibility to repay those debts in most cases. While the failure of the business may still weigh heavy on your heart, you can at least move forward without the fear of it causing lasting financial damage.