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When a Business Goes Bankrupt What is the Best Organization Type

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Considering what the best type of business organization to have in case the business goes into bankruptcy may seem like being too worried about failure to really start a company, but it is taking a realistic view of various scenarios, even if one of the scenario might the worst one of all.  But, every owner – starter of a company has to have a list of concerns and needs to prioritize the concerns.  In this situation the owner’s biggest concern is the best company organization to have in case the company fails and goes into bankruptcy.  From a comparison by people experienced in this as well as experts the best organization appears to be the “limited liability company” or LLC.  One advantage of an LLC is that an LLC allows for an unlimited number of owners, known as members in legal terms.  These members receive the same protections for liabilities as do corporate shareholders and company officers.  These members also receive the tax benefit of having the company’s profits and losses taxes as part of their own individual taxes. This means that unlike corporations this company profits are not taxed before being given to the owners, its members, who would then be taxed on their capital gains.  This is the notion of “double taxing” that corporations complain about.

An LLC is a state-level legal entity.  The IRS views companies only as a partnership, a corporation, or sole proprietorship.  The limited liability lies in the way that profit and or loss is passed through to the members of the LLC.  The powers of LLC members to enter into loan agreements and contracts for the LLC and its members need to be clean defined as to who can do what when and where.  Many lenders hesitate to give loans to an LLC without personal guarantees to secure the loan.  This is a consideration for bankruptcy, the owner’s main concern.  Without some operational procedures chaos can occur.  Also, for the purposes of bankruptcy, loans and contracts made by the LLC must be constructed so that the liability of the loans and contracts are the liability of the LLC and not its member(s).  This is essential in case the LLC finds itself in the unfortunate condition of needing bankruptcy protection.  In an LLC bankruptcy the better the clarity of what is LLC and what is members makes the situation simpler and easier for the trustee.  If the trustee cannot clearly define the difference between LLC and member liability, the trustee can simply exclude the liability from the discharge and or reorganization.  This will put additional unnecessary and unwanted burden of the LLC members.  The nice point of an LLC organization is that it clearly allows the identification, categorization, and separation of what is LLC and what is that which belongs to the members, especially in terms of liability.  That is one of the advantages of an LLC and that fits nicely into the main concern of our founding member about the LLC possibility of facing bankruptcy.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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