What Happens When An LLC Fails?
An LLC, or a limited liability company, is often the business structure chosen by small- to medium-sized companies. They are easy and inexpensive to form and manage, but they also feature a high degree of protection for their members. However, just as real estate sales can go smoothly and make a profit, an LLC can fail without warning. Understanding what happens in the event of failure may help you plan for all possible outcomes when forming or running your business.
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The owners of an LLC are not personally liable for their business debts and legal obligations. This is known as limited liability, one of the main benefits of forming an LLC. However, if your LLC fails, the following are some of the consequences:
The LLC is Dissolved:
When an LLC fails, the members interests are dissolved, and the companies assets are distributed according to the terms of its operating agreement. The dissolution of an LLC is not a permanent state, however. After all, when a company dissolves, it still has to pay taxes and other reports to file its annual returns.
As an LLC member, you may still have to pay taxes on your share of the companies income. Furthermore, if your company is dissolved, it may be difficult or impossible to get back any assets that were distributed before dissolution.
Assets can be Sold, and the LLC pays back Creditors:
When an LLC is dissolved, its assets will be sold to pay back creditors. If the LLCs creditors include your companies bank or other asset-holding financial institution, they will likely be able to take advantage of their bankruptcy laws to recover what they are owed.
If you do not have any assets other than cash, or if your cash is insufficient to cover all of your debts, your bank will likely be able to foreclose on any collateral available to them. If you cannot pay off your debts as they come due, you will be forced into bankruptcy.
The Business is Liquidated, and the LLC Closes:
After that, the business is liquidated, and the LLC closes itself. The process will be similar to a Chapter 7 bankruptcy, except you are liquidating the company instead of yourself. All the LLCs creditors are paid first, and any remaining money is distributed among owners or other parties with interest in your LLC.
If no asset is left after paying off the creditors, the llc owner or llc member is not directly liable for the debt. Instead, the government will take action according to the local state law.
But, there is still a chance of members liability because LLC members have to give some guarantee when taking money from creditors.
LLC Owners are not Responsible for any Tax or Debt:
As the owner of an LLC, you are not personally responsible for any tax or debt that the company incurs. If you have a separate business bank account, your assets will be safe even if your business fails.
You can also deduct some expenses from your taxes. Although it is possible to get sued by creditors or other parties involved with your LLC, it is unlikely that they will succeed in taking your assets as they could if you were just a sole proprietor or partner in a partnership.
But if you have given some guarantee while taking a load for your LLC, they might get succeeded in court. But, it is a chance.
Conclusion
The LLC structure is a great way to protect your assets from business liabilities. It can also help you save money on taxes and more flexibility in running your business. If you consider incorporating your company, an LLC may be your right choice!