Does LLC bankruptcy protect the members?

It protects the entity, not its members. 11 USC § 524(e) provides that the discharge of a principal does not affect the liability of any other entity, including a member who signed a personal guarantee. Members remain liable on guaranteed debts, trust-fund taxes under 26 USC § 6672, and any debt where the corporate veil is pierced. Members who want personal relief must file their own bankruptcy.

Does an LLC get a Chapter 7 discharge?

No. 11 USC § 727(a)(1) limits Chapter 7 discharges to individuals. Like corporations, LLCs receive no discharge in Chapter 7. The trustee liquidates assets, pays creditors per the § 507 priority order, and the LLC ceases to operate. A discharge would have no practical effect since the LLC stops functioning.

Can an LLC file Subchapter V?

Yes if eligible. Subchapter V under 11 USC § 1181 is available to small business debtors with non-contingent, liquidated, secured and unsecured debts under the current statutory cap (currently $7.5 million through expirations and reauthorizations) where at least 50% of the debt arises from the debtor's commercial or business activities. Many small LLCs meet these tests.

Can a single-member LLC be reached in the member's personal bankruptcy?

Yes. The member's ownership interest is property of the bankruptcy estate under 11 USC § 541. A Chapter 7 trustee can sell or assign the membership interest. State LLC laws may give the trustee only a charging-order remedy if the operating agreement is well-drafted, but trustees often reach the cash value of single-member LLCs more aggressively than multi-member ones.

What is a non-bankruptcy alternative for an LLC?

State-law options include voluntary dissolution under the relevant state LLC statute, an assignment for the benefit of creditors, and an out-of-court workout with creditors. These can be faster and cheaper than bankruptcy when the asset and claim pictures are simple. Bankruptcy makes more sense when there are contested assets, fraudulent-transfer issues, or contracts that require court-supervised assumption or rejection under § 365.

LLC Bankruptcy - Options for Limited Liability Companies

Yes. An LLC is a 'person' eligible to file under 11 USC § 109 and § 101(41). LLCs commonly file Chapter 7 to wind down or Chapter 11 (including Subchapter V if eligible) to reorganize. Single-member LLCs are treated as separate legal persons in bankruptcy even though they are disregarded for federal tax purposes.

LLC Bankruptcy Options

An LLC (Limited Liability Company) has several bankruptcy options:

Chapter 7: Liquidation. A trustee sells the LLC's assets and distributes proceeds to creditors. The LLC ceases to exist. No discharge is available for business entities.
Chapter 11: Reorganization. The LLC continues operating while restructuring debts under a plan. Subchapter V is available for small businesses with debts under $7.5 million.
State dissolution: Dissolve the LLC under state law without bankruptcy. Works when there are few debts or assets.
Assignment for benefit of creditors (ABC): A state-law alternative to Chapter 7 that may be faster and cheaper.

Personal guarantees: If you personally guaranteed the LLC's debts (which is common), the LLC's bankruptcy does not discharge YOUR personal liability. You may need to file personal bankruptcy separately.

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