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How will Chapter 7 affect a New York LLC?

If you own a New York LLC, you are likely wondering how it will be affected by a Chapter 7 filing. If you are a single-member LLC, will you have to shut the business down? What about the other members if you are part of a multi-member LLC?

Like corporations, LLCs are separate legal entities that assume liability for their own debts. Owners are not typically responsible for business liabilities, which is why so many New York entrepreneurs form an LLC to add a layer of protection between their personal assets and the company’s creditors. There are circumstances that allow creditors to bypass this shield, such as personally guaranteeing a debt or offering your personal property as collateral, but LLC owners always have the option of avoiding such involvement.

Single-member LLCs and bankruptcy

If you are the only member of your LLC and file for personal bankruptcy under Chapter 7, the bankruptcy court will treat your ownership interest as an asset and include it in the bankruptcy estate. Unless you can include the company in a state or federal exemption, your trustee has the authority to assume control of the enterprise and even sell it to distribute the sale proceeds among your creditors. This step effectively removes the business from your control and will force you to start over after your discharge.

Multi-member LLCs and bankruptcy

When you own an LLC with other members and file for Chapter 7, the other members may attempt to invoke a provision that strips you of membership when you become insolvent or file for bankruptcy protection. This measure won’t stop your bankruptcy trustee from treating your interest in the LLC as an asset and liquidating it.

Their first step is usually to sell your interest to one of the other members. If it is sold to an outside party, then New York law only allows the buyer to benefit from their economic interest in the company. They cannot participate in management decisions if a majority member vote allows it.

Alternatively, your Chapter 7 trustee can seek to dissolve the LLC, although the consent of other members will be needed if you held a membership interest of less than 51%. They may also attempt a judicial dissolution, although this step is normally limited to instances where the management of the company is so dysfunctional that keeping it going is no longer practical.

If you are the sole owner of an LLC or one of many members, then a New York bankruptcy attorney can advise you on how a Chapter 7 filing will affect the future of the company. This information will help you make the best decision for your situation and let you know what to expect in the months ahead. Contact Jayson Lutzky, P.C. if you are interested in filing for bankruptcy. Chapter 7 can help you regain your financial freedom. Call 718-329-9500 to set up a free in-person initial consultation to help determine if bankruptcy is right for you. Visit mynewyorkcitylawyer.com to learn more.

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