One of the scariest times in the life of a business is its decline. This is usually due to a loss of revenue or customers. Costs rise and profits sink. If you are a business owner, particularly under an LLC, what happens to your business if it goes under?
If an LLC (or limited liability company) falls into bankruptcy, the
business can enter a restructuring in Chapter 11 or for an immediate
liquidation of assets, Chapter 7. In a chapter 7 filing, all of the
LLC's assets are sold and the money gathered from that sale is then
distributed between the creditors that are owed. If an LLC files Chapter
11, the company begins a restructuring process, aided by a court to
dissolve the debt slowly and continue on with the business.
Fortunately, members of an LLC are only responsible for any debts that
are incurred in the business name alone, and if filing for bankruptcy, a
court will assist in settling all business operations. If the LLC is
filing bankruptcy and has a personal guarantor, it will have an effect
on the guarantor's credit rating and personally guaranteed debts can be
reported on a credit report for up to 10 years.
Upon choosing whether to make your company an LLC, you may want to keep
all of this in mind. You may not lose anything personally, but it can do
harm to the credit of a guarantor. As an owner of an LLC, it's vitally
important to do anything you can to prevent having to file Chapter 7 or
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