What you must know before filing bankruptcy
for your business
Since Limited Liability Corporations (LLC) are a relatively
new type of business entity, LLC owners have some difficulty
finding out how courts will treat their bankruptcy
LLC cases. Will the judge treat them like an LLC, as
a corporation or as a partnership? What will happen
during a bankruptcy LLC when the company has only one
owner? Currently, there is no code or law that directly
addresses bankruptcy LLC proceedings.
Partnership versus Corporation in Bankruptcy LLC
There are two different ways a bankruptcy court may
handle the case of Limited Liability Corporation with
a single owner. First, the judge may treat the bankruptcy
LLC like a partnership. In this case the court would
dissolve the LLC and deal out all remaining assets
to creditors. Anything remaining goes to the owner.
On the other hand, the judge may decide the LLC is
a corporation. Here the judge would not dissolve the
owner from the bankruptcy LLC. The former owner could
give over ownership interest to another party. If the
former owner decided not to do this, the bankruptcy
judge would treat the former owner like a corporate
shareholder. The owner would not have to give up stockholdings,
just as a shareholder wouldn’t in a large corporation
bankruptcy case.
Legalities of a Bankruptcy LLC
Keep in mind the most difficult part of filing for
bankruptcy LLC is there are no specific rules for dealing
with a Limited Liability Corporation. Because of this,
there may be several different factors that a bankruptcy
court considers when deciding what to do. The most
important factor is the number of member owners in
the corporation. That said bankruptcy laws do not define
the number of individual owners a corporation must
have, especially for an LLC.
Because the lines are so blurry here, it is hard to
tell how the bankruptcy court will decide who needs
to consent to the bankruptcy filing. All members of
the LLC may have to consent to the bankruptcy LLC filing.
On the contrary if the judge treats it like a corporation,
then only one member must consent. Most often in LLC
proceedings, the bankruptcy judge looks to state laws
and codes to determine how to deal with the bankruptcy.
Therefore these proceedings may vary from state to
state.
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