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Member Liability if a LLC Goes Bankrupt

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  • 01-06-2017, 12:03 PM
    lawfacts
    Member Liability if a LLC Goes Bankrupt
    The members of a two-member LLC in California, an individual and a trust company each with a 50% interest, are considering filing bankruptcy for the LLC, as it is facing financial difficulty. Is it possible that the personal assets of the members of the LLC will be subject to claims by creditors in bankruptcy, or will the limited liability aspects of the LLC shield their assets from creditors?
  • 01-06-2017, 02:41 PM
    Mr. Knowitall
    Re: Member Liability if a LLC Goes Bankrupt
    Most businesses that fail simply wind down without going through bankruptcy. If the members of the LLC believe that the liabilities warrant either a formal Chapter 7 liquidation, or want to go through the costly process of a Chapter 11 restructuring, they should consult a bankruptcy lawyer about the LLC's assets and debts. If they simply want to shut down the business, they may find that there is no need to file for bankruptcy.

    The principal purpose of any limited liability structure is to shield the members (or, for corporations, shareholders) from the liabilities of the separate corporate entity. It is possible that the creditors would attempt to pursue the members based upon their personal acts, personal guarantees, or due to their failure to properly manage the LLC and its assets. There is no way to address the issue of individual liability without examining the specific facts and potential claims.
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