debt

Personal liability may survive defunct LLC

Justin HarelikQuestionDear Bankruptcy Adviser,
In 2009 I invested my savings into a limited liability company (LLC) which operates a sandwich shop. Unfortunately, the financials are in the negative and I've decided to close shop. I have no other outstanding liabilities, except a lease that has three years remaining on it. I want to declare bankruptcy for the LLC. Will bankruptcy terminate the lease? Is there any other legal course of action I can pursue to terminate the lease?
-- Vivian

AnswerDear Vivian,
Your plan depends on whether you personally guaranteed the lease on behalf of the LLC. An LLC is used to structure a business so that legal liability is limited for the LLC members (in this case, that's you). An LCC can also provide favorable tax treatment for profits and transfer of assets.

The vast majority of LLCs are set up by individuals who have little or no money to invest in the business. The business will initially borrow money either from vendors, banks or even family to start up the business.

When obtaining the startup credit or capital, the lenders usually will ask about your personal assets and liabilities. These entities don't want to provide money or credit to a person that has large, or even minimal, personal debts. Especially now, when lending has become very difficult, lenders want to make sure you, the individual, will be liable if your business fails.

A lease agreement is essentially the same thing as a vendor or bank giving you a line of credit. A lease is a contract giving you the right to possess property belonging to someone else. If the landlord was conservative and prudent, he or she might have asked you to personally guarantee the terms of the lease. While you set up the lease through the LLC for tax benefits, the landlord does not care. He or she wants to guarantee payment of the lease even in the event your business fails.

If the lease agreement was not personally guaranteed and the LLC is no longer operating, then you may not have to worry about the lease anymore. The landlord can only legally pursue the LLC to make the lease payments. Since the LLC is no longer operating, and in all probability has no assets, the LLC can be dissolved without any further course of action.

More likely than not, however, you are personally liable for the lease agreement. This means that while you can shut down the LLC and don't need to file an LLC bankruptcy, you personally might be forced into bankruptcy.

Review your lease agreement prior to informing the landlord of your intention to shut down the sandwich shop. You are always in a better position to talk with the landlord when you know your liability. Once you notify the landlord that you are going to cease operations, the landlord will aggressively seek to enforce any of his or her legal rights.

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