Yes, You Can Be Personally Liable for an LLC’s Business Debts
Starting a new business is risky, and you do not have much of a financial cushion, but you do have a plan for protecting yourself from financial ruin in the event that your business has to close because it cannot pay its debts. You have discovered a little-known hack in the entrepreneurship system; it is the LLC business structure, and it is hiding in plain sight in the IRS form that all businesses use to apply for a taxpayer ID number. When you incorporate your business under the limited liability company (LLC) business structure, then you, as the owner of the LLC cannot be personally liable for debts owed by the LLC. If things are going wrong, your LLC can just file for chapter 7 bankruptcy, or better yet, file a final tax return and then disappear into the ether. Of course, there are exceptions to the rule about LLC owners being shielded from their LLCs’ debt obligations. If your LLC is filing for bankruptcy and you want to protect your personal assets, contact a Jupiter family and small business bankruptcy lawyer.
LLC Owners Voluntarily Assume Responsibility for Their LLCs’ Debts More Often Than You Think
Most cases of business owners being responsible for the debts owed by their LLCs are not just a matter of bad luck; the owner’s personal liability for the debt began before the lender even released the money. LLCs, like any other borrower, can only borrow money after they have established their credit history. In practice, this means that, when borrowing money for a newly founded LLC, business owners often assume responsibility for repayment, either by co-signing for the business loan or by pledging their personal assets, such as their houses as collateral. Co-signing on a business loan for your newly established LLC is as risky as co-signing on a car loan for your 20-year-old nephew.
The Burden of Proof Is on the Creditor to Show That the LLC Owner Should Be Personally Liable
Even when the LLC owner did not voluntarily assume responsibility for the loan from the beginning, there are also situations where a creditor suing an LLC for an unpaid debt may persuade the court to hold the LLC owner personally responsible for repaying the debt. Holding a business owner legally responsible for the financial obligations of a business is called piercing the corporate veil. Creditors may persuade the court to pierce the corporate veil if they can present compelling evidence that the business owner is only using the LLC as a shell corporation, in order to avoid personal liability to personal debts. The court may also pierce the corporate veil in cases of fraud, such as where the business owner knowingly made false statements on a loan application when borrowing money in the LLC’s name.
Work With a Debt Lawyer About Business Debts
A South Florida debt lawyer can help you protect your personal assets while closing an LLC that cannot pay its debts. Contact Nowack & Olson, PLLC in Jupiter, Florida to discuss your case.
Source:
nolo.com/legal-encyclopedia/personally-liable-llc-corporate-debt-bankruptcy.html#:~:text=A%20corporation%20or%20LLC’s%20owners,and%20risk%20losing%20personal%20assets.
