You can just close your doors and go home, leaving your affairs in complete disarray. When the daily merchant cash advance debits and the lender calls pile up, that is the plan a lot of the owners we talk to at Delancey Street have in mind. You can walk away, I suppose. But what happens then? If you can’t pay someone to whom your company owes money, you can’t wipe out the liability simply by shutting down the business. A member of an LLC is not personally liable for business debts just because the LLC is dissolved. What decides where the debt ends up is how and when you close. Here are six things that happen to business debt when you dissolve an LLC.
Either Paying or Settling with Creditors
First, the known creditors get paid before the owners get anything. Before you distribute any assets or profits to yourself, make sure that all of the LLC’s known creditors have been paid. If the company is dissolved properly, by paying creditors, all that is left is the distribution to the owners. Then the company’s doors can be shut, if that is the owners’ desire.
Second, if the owners take the assets and skip the creditors, the debt can follow those assets. If you distribute LLC assets to the owners without informing and paying creditors, those creditors have a legal right to follow the assets distributed to the owners and collect what is due to them. Any distributions upon dissolution that members receive may be subject to the claims of creditors, meaning a member may need to return distributions made upon dissolution to pay the LLC’s creditors. The dissolution rules exist to protect creditor rights and prevent owners from simply stealing money out of the LLC before the creditors can get paid.
Third, if the LLC is insolvent and has distributed nothing, creditors have no personal assets of the owners to pursue. Hopefully, you have an up-to-date balance sheet for your LLC. (You do, right? It’s a basic part of recordkeeping, and if you’re running a business you should have it.) If the balance sheet shows negative equity (liabilities greater than assets), and you haven’t paid yourself any dividends or distributions, then there is no other money for a creditor to claim, as far as the owner is concerned. Your LLC is a separate entity, and the obligations of the LLC are treated separately from your personal obligations. That is also why the rule of thumb is so plain: If, for some reason, the LLC’s assets aren’t enough to pay off all the debts, don’t make any distributions to yourself.
Fourth, closing the company to dodge the debt and then starting over doesn’t work. If you have known creditors, don’t close the LLC and try to re-open a new one. If your LLC has unpaid business debts, you can’t close the LLC and just open another LLC that sells similar things to similar customers in order to avoid paying the debts of the first LLC. It’s not allowed, and it doesn’t accomplish what you want even if you do it. The only legitimate way to close an LLC is after ceasing normal business operations, and either paying or settling with creditors (if any). Remember that not paying a creditor is not the same as settling with one. This is where a negotiated settlement can fit: at Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed, so known creditors can be resolved before the company is closed.
Notice to Creditors
Fifth, giving notice can shorten the window creditors have to come after the company’s assets. State law controls the process to close the business, but the operating agreement may have additional rules. If the LLC has multiple members, you will need to follow the state statute and the operating agreement on which members have decision-making power over how to pay creditors and dissolve the LLC. A common order of events: pay off debts first, then return what the members originally put in, then split the remaining money among the members. The LLC’s creditors have a claim against the LLC’s assets, but you don’t want them coming back to you after the LLC closes. When an LLC dissolves, many states require letting your suppliers and others you owe money know about it, and that can work in your favor, because in some cases notice may shorten the time they have to file a claim against the LLC’s assets. If you’re trying to get the business shut down as soon as possible, find out if your state requires notice to creditors and - assuming you can figure out who the creditors are - send those notices as soon as you can.
If You Have an Impending Liability
Sixth, old claims are treated differently depending on what you knew when you closed. Say you are a member of LLC Corp. LLC Corp does something in 2014. In 2015, with no known creditors, the company is dissolved. Then, in 2017, after LLC Corp has been dissolved for 2 years, someone finds out about the 2014 incident and sues. If there are no known creditors when the LLC dissolves, the owners can’t be liable for claims that happened before the dissolution, unless the LLC knew about the cause of the claim.
Knowing about a problem changes the picture, so don’t think that the dissolution of your LLC is an “out” if you have an impending liability. If you are considering dissolving your LLC and aware of a potential liability (even where no lawsuit or judgment exists), you may be personally liable up to the amount of LLC money distributed to you. In the 2014 case CB Richard Ellis v. Terra Nostra, an LLC didn’t pay a commission it owed its real estate broker under a listing agreement. The LLC then dissolved. The broker eventually obtained a judgment against the dissolved LLC, and then was able to go after the LLC members personally for amounts up to the amounts they had received from the dissolution. If your LLC is in trouble and you have any reason to believe that someone else might accuse it of owing them money, don’t distribute any assets. If you do, you could get dragged into court, and, as a worst-case scenario, could lose the assets that you received from the LLC. If you know something happened that might lead to a lawsuit, but you aren’t sure whether it is a legitimate claim, you should be careful before closing down the LLC. A precaution is to wait until the statute of limitations has run out for each claim. A lawyer can help you determine whether you need to wait before dissolving.
So where does that leave an owner under debt pressure? If your LLC cannot pay its debts in full, weigh your options before deciding to dissolve your LLC. The sensible approach is to make an orderly transition out of business in order to minimize disruption and liability. Decide whether to pay off or negotiate settlements with the LLC’s creditors, or file for bankruptcy. We are not a law firm, and the rules vary by state, so get specific advice for your situation; when bankruptcy is the better path, we route owners to an independent attorney. A first consultation with us is free and confidential.
