Limited Liability Corporations or LLCs are authorized by states to operate in that manner. The Internal Revenue Service treats LLCs in various ways depending on their structure. In some cases, an LLC will be treated as a partnership and in others, as a corporation. In January of 2014, new laws were passed in California to govern how LLCs operate which eliminated and dramatically changed the original laws known as Beverly-Killea LLC Act.
Like any other business, an LLC can run into financial difficulties which may make it impossible for them to meet their debt obligations. Additionally, members of an LLC may run into personal financial problems which could result in them filing personal bankruptcy. What is not always clear is your bankruptcy options if you have an LLC.
Understanding the rules
Many consumers elect to file for bankruptcy under Chapter 13 of the bankruptcy code. Simply put, this part of the United States Bankruptcy Code, known as "wage-earners" bankruptcy, allows debtors to reorganize their debt and keep most of their assets. Unfortunately, under this section, you cannot file Chapter 13 if you have an LLC. There are two specific bankruptcy options, Chapter 7 which is a complete liquidation of all assets and Chapter 11 which allows for a reorganization of debt.
Bankruptcy may not be the only option
What is interesting to note for those who have an interest in an LLC is that bankruptcy may not be your only option. One of the most frequently used options is an out-of-court settlement with creditors. This option is especially useful if there seems to be a clear way back to financial stability. In these cases, your attorney could negotiate with your creditors and point out how future cash flow could assist you in repaying debt and getting your business back to profitability.
Bankruptcy should be considered when there seems to be no other options for getting out from under crippling debt. If you are uncertain what options are available to you under California LLC rules that apply to debts and LLCs contact Law Offices of James C. Shields for help. We handle all types of creditor and debtor issues both for individuals and for those who may be involved in small businesses that were formed under the California LLC rules.