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What happens to the outstanding debt of your dissolved LLC?

On Behalf of | Feb 8, 2022 | Business & Commercial Law

If you plan to dissolve your limited liability company because your business is unable to pay its financial obligations, there are a few important considerations you should make first. For instance, know that dissolving your LLC does not automatically dissolve your obligation to debtors.

You have an obligation, as a business owner, to not only dissolve your LLC properly but also, to dissolve it with integrity. According to UpCounsel, dissolving your business with integrity means first paying off as many of your business-related debts as is financially feasible. What happens, though, if you run out of money and have significant business debts remaining?

The liquidation of assets and inventory

To dissolve an LLC because of financial issues, several things must occur. Among those include the liquidation of your business’s inventory and assets.

Because an LLC is set apart from its owners, creditors can only collect repayment through its assets. Once you file the paperwork to terminate your LLC, you must then liquidate your business’s inventory and pay off creditors in the appropriate order of priority. If you do not recoup enough money via liquidation, you can use the remaining assets to satisfy debts.

You must offer up the business’s assets to the right people before you distribute them amongst the owners. If you or the remaining owners end up keeping any assets for yourself before you attempt to satisfy outstanding obligations, creditors gain the right to sue you personally.

If your situation is dire enough that you cannot satisfy outstanding obligations regardless of how creative you get, your creditors may have to declare that they cannot collect the debt from your company. In an extreme situation, you may have to declare business bankruptcy.

Personal liability for business debts

Generally, creditors cannot sue the owners of LLCs personally because of the way LLCs are formed. However, this is not always the case.

If you obtained a business loan by attaching a personal guarantee to it, the loan becomes personal property. As a result, the lender may sue you personally to satisfy the debt.

Moreover, if you close your business before satisfying payroll taxes, sales taxes or other taxes, know that said taxes do not just go away. State and federal agencies may sue you and the other owners personally for repayment. Finally, if you regularly commingle your personal and business finances, creditors may sue you based on the notion that you used the company as a cover for personal dealings.

If you plan to close your LLC because of financial distress, make sure you do so properly. Failing to dissolve the company appropriately could expose you to legal and financial troubles.