Podcast Your Business LLC and Bankruptcy

Welcome back to another session where I will discuss something very important: the confusion with business bankruptcy, especially with the issue of a limited liability company. There’s a belief that because a business owner has an LLC, they are protected 100% from liability with a business loan. However, that is far from true. So today, we will discuss LLCs and Chapter 7 business bankruptcy.

Updated on February 22, 2025.

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Red Lobster Heading for Bankruptcy

Before we get into these issues, I have been blogging about Red Lobster. They recently closed fifty locations. In my blog, I’ve included a list of closed locations. Of course, this begs the question of whether Red Lobster is filing for bankruptcy, and the answer is yes! I’ll post soon on Red Lobster’s bankruptcy case.

Find Out Which Red Lobster Locations Are Closing

Business Bankruptcies

When it comes to a business bankruptcy, there are only two choices: stay open or close.

A Chapter 7 business bankruptcy can be filed if you’re closing the business. If the business will keep its doors open, then it’s a Chapter 11 business bankruptcy.

Chapter 13 bankruptcy is not an option. Only individuals can file Chapter 13. However, it’s easy to get this mixed up because a business owner can file Chapter 13 bankruptcy, but it’s for personal debts.

Chapter 13 bankruptcy is known as a reorganization, which means that you’ll be paying back your debt over x amount of time. In this case, three or five years. This is similar to Chapter 11 bankruptcy.

Chapter 11 business bankruptcy is also a repayment plan, a reorganization. It is not a liquidation, like Chapter 7 bankruptcy, which means you’re closing shop. But that’s where the confusion comes in.

People file for a Chapter 7 business bankruptcy and say creditors can’t touch them because they have an LLC. Well, let’s discuss what an LLC is.

What is a Limited Liability Company (LLC)

A limited liability company means what it sounds like liability is limited, but to a certain extent, depending on the facts. But to oversimplify, you are protected based on what you put in.

So, if you put 100K into the business, you are liable for up to 100K. Sounds easy, but that’s where people get confused. Owning an LLC doesn’t mean you are entirely off the hook.

Personal Liability with a Limited Liability Company

First, let’s discuss personal liability. There’s a good chance that you are personally liable for your business’s debts.

Did you get a business loan? I have a business loan; my last payment is in August of this year. I can’t wait to pay that off. I’m tired of checks getting paid out every single month since COVID. But that’s the perfect example.

If I get sued for not paying that business loan, the bank will file a lawsuit against me and the business. But they can’t get me if I close the business, right? Now, go back to what I just said. The bank will file a lawsuit against (me) and the business. While the business is gone, I’m not.

Now, how is this possible? Because somewhere in that long list of documents you scrolled through when you signed the loan contract online, you scrolled to the bottom and clicked “I agree.” Besides agreeing to all the terms and conditions, a clause likely says you are personally liable for the business debt. For my business loan, I’m personally liable.

Is it possible to not be personally liable for business debt? Yes, usually, in larger corporations where there is a definite separation between the business owner and the corporation, but chances are you are personally liable for business debt. So, if you’re personally liable, having an LLC has nothing to do with the business loan or business line of credit you agree to be liable for.

But let’s go a step further. Suppose there’s no issue with the business loan because of a great working relationship with the lender. Clearly, your company is not responsible for that business line of credit. Can there still be personal liability? Yes!

Piercing the Corporate Veil

What is piercing the corporate veil? If there’s no separation between the individual and the business, the “veil” or shield that protects business owners has been pierced. And what does that mean?

It goes back to personal liability. It means that they can file a lawsuit against you. Now, what’s the easiest way to avoid this?

How to Avoid Getting the Corporate Veil Pierced

Whatever your business is, suppose you go to Office Depot, buy supplies, and pay for them from your personal checking account or use your business account to pay for personal items. You also pay for your business taxes from your personal checking account.

Some business owners might receive a check related to their business and deposit it into their checking account. The more there’s a mixture of your personal and your business, the more likely you are to pierce the corporate veil that protects you.

Once the corporate veil is pierced, an LLC isn’t going to protect you. It means nothing at the end of the day because there is no distinction between the individual and the business. You have to keep things separate. Don’t mix!

Suppose you own rental properties and pay for the utilities. Each property should be a separate company with separate checking accounts, and the utilities and any bills related to that specific property from the corresponding checking account. That’s how you limit your liability.

But if you start paying for everything out of your personal account, that’s when you’ll have the problem. That’s when your LLC means nothing and a business bankruptcy will not protect you nor will you be immune from lawsuits personally.

Please note the information on this site should be used for informational purposes only and does not constitute legal advice.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

Additional blog content is available below:

• Bankruptcy
• Your Wallet

Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.

This podcast transcript was edited for clarity.