Many small businesses fail within the first few years of operations. Entrepreneurs aspiring to start their own companies frequently try to protect themselves from financial exposure. They may do so by forming a limited liability company (LLC) instead of operating a sole proprietorship where they may have direct liability. An LLC helps minimize the liability that an entrepreneur accepts when starting a company.
The business is a separate entity with separate assets and financial obligations. Should the company fail or face significant lawsuits, the owner has a degree of protection thanks to the company’s structure. Unfortunately, some people intentionally abuse the protection extended by an LLC. When the company begins to struggle, they may try to avoid personal responsibility while benefiting as much as they can from the company’s resources. They may transfer assets to themselves and drain a company of any remaining value before dissolving it. They may leave their creditors without many options for recourse if they leave debts unpaid.
Can businesses owed money by a failed LLC hold the person who started or operated the LLC accountable?
LLC structures do not provide absolute protection
The creation of an LLC helps limit the liability of the parties who own and operate the company. However, they have to follow the law and carefully adhere to best practices to maintain that protection. They can still have a degree of personal liability in some scenarios. For example, if there have been questionable transfers of company assets prior to attempts to dissolve the organization or prior to attempts to dissolve the organization, there may be reason to question the conduct of the person operating the LLC.
Certain fraudulent transfers and other forms of financial misconduct could give creditors an opportunity to hold the owner of the business directly responsible. If the courts agree that misconduct occurred, it may be possible to pierce the corporate veil and take legal action against the person who formed or owned the LLC. Either their future income or their personal resources could be vulnerable in such scenarios.
Business collection efforts can be particularly difficult when the company that owes money has failed. Exploring every viable solution for recouping business debts can be beneficial for creditors left without the payment they deserve for business debts.