Function

• A limited liability company, or LLC, represents a business entity where the owners of the business have "limited" responsibility for the business debts. The LLC caps the owners' financial responsibility at their personal investment in the enterprise. The LLC has the same protection as does corporations. An exception occurs if owners signed personal guarantees for any debts such as a credit card. Many states hold the owner responsible for non-payment of employment taxes. In addition, if the LLC owners commingled personal finances with the limited liability corporation's funds, this action would "pierce the veil" that separates business and personal matters.
  
  

Filing

• Start the process by going to the U.S. Bankruptcy Court to file a petition. You will also need to include various financial documents detailing assets and liabilities of the LLC, income and expenses, real property and assets ownership, creditors and amount owed and other information. Immediately after the LLC files the case, the court issues an order called an "automatic stay," which stops creditor from contacting the business and prohibits any action to collect on the debts of the LLC.
  
  

Types

• A business may file for Chapter 7 or Chapter 11 bankruptcy. Many Chapter 7 cases usually involve few assets and the LLC intends to shut down operation. Once the LLC files the case, a trustee takes over the assets, liquidates them and pays priority claims and the creditors with the monies left after costs. Chapter 11 allows the entity to remain open as it reorganizes it finances under the protection of the bankruptcy court. The LLC may renegotiate its real estate lease or equipment contracts. The LLC must work out a reorganization plan that the creditors and the court approve.
  
  

Misconceptions

• In personal Chapter 7 bankruptcy cases, the court discharges certain debts and the law prevents creditors from attempting to collect on them in the future. LLC cases are "closed;" the court does not "discharge" the obligations. This means the creditors can start collection activities once the court "closes" the bankruptcy proceedings.
  
  

Expert Insight

• Maryland bankruptcy attorney Brett Weiss states on the bankruptcy law network that it does not benefit most LLCs to file a Chapter 7 bankruptcy because section 727 (a)(1) of the codes states: "The Court shall grant the debtor a discharge, unless--the debtor is not an individual." He goes on to say that in cases where there are "preferences, recoverable assets or general assets, and taxes are owed" the LLC could liquidate the assets to make sure that these items gets paid before creditors, which lessens the LLC owner's personal liability for them. In addition, you can also use Chapter 7 to ensure a fair distribution of assets when the LLC has many creditors.