When an LLC Fails: What Happens to Its Debts?

Starting a business means forming a limited liability company (LLC) with high hopes. Most startups fail, though. You might face the hard reality of closing your business when things don’t work out.

You’ll need to deal with the LLC’s debts. But how do you handle those obligations?

Struggling with Personally Guaranteed Business Debts?

Cambridge Credit Counseling creates custom payment plans for business owners facing personal liability. They negotiate with creditors to reduce payments and protect your assets.

Reduce Your Payments

We’ll show you your options for managing debts when your LLC fails.

LLCs Can Limit Personal Liability

You formed an LLC for the personal liability protection it offered. Good news: you’re not personally liable for the business debts.

Creditors cannot pursue you personally. They can’t go after your personal assets to settle the debt.

They can go after the LLC’s remaining assets, however.

One exception exists to your personal liability protection. If you personally guaranteed any business debts, you’re liable for those debts. Personal guarantees are common with business loans.

You may need to continue making payments or pay the debt in full. Creditors can sue you personally if you don’t. Your personal assets face risk, including your home.

Bankruptcy Can Help Resolve LLC Debts

You can file bankruptcy for the LLC to resolve its debts. In bankruptcy, the LLC’s assets are sold to pay creditors. The LLC stops being responsible for remaining debt.

Personal guarantees still leave you responsible, though. You’ll need to settle those debts with personal funds. You might need to file personal bankruptcy if you can’t pay. Negotiating with creditors offers another option.

Our partner Cambridge Credit Counseling can help you create a payment plan for personally guaranteed debts.

Follow These Steps to Dissolve Your LLC

You need to dissolve your LLC whether you file bankruptcy or not. Without formal dissolution, you’ll remain responsible for state filing and fee requirements.

Dissolving an LLC involves multiple steps. We’ll break down seven simple steps you can take.

1. Vote to Dissolve the LLC

Your operating agreement should define the voting procedure for dissolution. Generally, a majority of members must vote to dissolve.

Check your state’s default rules if you don’t have an operating agreement. Follow those procedures carefully.

Draft a resolution to dissolve the LLC once the vote occurs and is recorded.

2. Notify Your Creditors

Notify your creditors in writing about the LLC’s dissolution. Give them specific instructions about filing claims.

State laws dictate how long creditors have to file claims. The period usually can’t be less than 180 days from written notice.

Creditors include any party the LLC owes money to. Vendors and leaseholders count as creditors. Claims filed after the deadline are invalid.

3. Settle Financial Obligations

You must settle any claims filed before official dissolution. Settle the debts with remaining LLC assets or file bankruptcy.

Settle all tax obligations at federal, state, and local levels. Cancel any business contracts and leases. Settle those obligations too.

4. Notify Tax Authorities

Provide written notice of pending dissolution when you settle tax obligations. Notify all tax authorities you’ve had obligations to.

5. Cancel Licenses and Permits

Cancel any business licenses and permits your business required. Canceling prevents automatic renewal fees.

6. Distribute Remaining Assets

Liquidate any assets remaining after settling financial obligations. Distribute them to members based on their ownership percentages.

7. Formally Dissolve the LLC with Your State

Every state has different dissolution procedures and requirements. You’ll file dissolution documents with the state.

You may need to attach proof that tax obligations are settled. Follow dissolution procedures for any states where your LLC registered as a foreign LLC.

Follow the entire dissolution process according to your operating agreement and state laws. Proper dissolution prevents future legal issues.

Try Again

Business failure can feel disheartening. You don’t have to give up your entrepreneurial dreams.

Failure offers an opportunity to try something new. You may develop a new business idea worth pursuing.

Examine why your LLC failed. Learn from what happened. Use that knowledge to build a new strategy for your next business.

Most startups fail, but many also succeed. Successful entrepreneurs often experienced multiple failures before finding a winning idea. Failure is a learning process for those with entrepreneurial spirit.

Protect Your Personal Finances

Managing personally guaranteed debts becomes critical when your LLC fails. You need a clear plan to avoid personal financial disaster.

Cambridge Credit Counseling specializes in creating payment plans that work with your budget. They can negotiate with creditors to reduce your monthly payments.

Don’t wait until creditors start collection actions. Taking action now protects your credit score and personal assets.

Frequently Asked Questions

What happens to LLC debts if my business fails?

LLC debts are typically limited to the business assets. Creditors can pursue the LLC's remaining assets but not your personal assets, unless you personally guaranteed specific debts. Personal guarantees make you liable for those particular obligations.

How do I dissolve an LLC properly?

You need to vote on dissolution, notify creditors in writing, settle financial obligations, notify tax authorities, cancel licenses and permits, distribute remaining assets, and file formal dissolution documents with your state. Each step is essential to avoid future legal issues.

Can I file bankruptcy for my LLC?

Yes, you can file bankruptcy for your LLC to resolve business debts. The LLC's assets are sold to pay creditors, and remaining debt is discharged. However, any personally guaranteed debts remain your responsibility even after LLC bankruptcy.

What are personally guaranteed business debts?

Personally guaranteed debts are business obligations where you signed a personal guarantee promising to pay if the LLC cannot. These are common with business loans and leases. You remain liable for these debts even if the LLC fails or files bankruptcy.

How long do creditors have to file claims against my LLC?

State laws typically require you to give creditors at least 180 days from written notice to file claims. Claims filed after your specified deadline are not valid. You must notify all creditors in writing about the dissolution and provide filing instructions.