Bankruptcy for Limited Liability Companies – LLC Bankruptcy
Limited liability companies, called LLCs for short, have been a popular business form of organization because of strong protections from creditor liability. Although Kentucky LLCs can file bankruptcy, it is much more common that members will file bankruptcy. When an LLC interest has net assets, trustees have had only moderate success in reaching the assets of the LLC and distributing funds to creditors. It is very difficult for creditors of a member to sell off assets of a Limited liability company. An LLC is like a partnership in the relationship between the members and owners of the business. In most cases, a member’s interest in an LLC can not be transferred, voluntarily or involuntarily, without the permission of all the other business members of the LLC. This prevents an outsider from becoming an LLC member and participating in decisions and management of the business unless everyone agrees. Outside creditors are not permitted to force their way in and become a member.
Judgment creditors of an LLC member can only ask the court for a charging order that transfers to the creditor all the member’s distributions from the LLC operations. If the other members decide not to distribute profits from the company, the creditor has no recovery. However the Florida Supreme Court authorized the FTC as a judgment creditor, to force the sale of assets if an LLC when the LLC was a single member LLC. Since a bankruptcy trustee has all the rights of a judgment creditor as well as other powers granted by the bankruptcy code, a single member LLC offers very little protection to a bankrupt member.
However when the LLC has no real assets or liquidity this should not be a problem for the LLC or it’s members. More often than not there is no real equity in the assets of most LLC corporations that have ongoing operations. But the crafty debtor that is only seeking to shield his assets by transferring them to a single member LLC that has no ongoing business purpose other than the shielding of assets wont be able to protect those assets in such an LLC.