Topic: Business bankruptcy

limited liability company

Can a Limited Liability Company’s creditors go after the owner’s personal assets?

Question asked by James “Seamus” Lusk, on Quora: If a Limited Liability Company goes bankrupt, can the company’s creditors go after the owner’s personal assets?

Answer from Victor Fong, Licensed Insolvency Trustee in Toronto, Canada

Caveat: I practice in Canada and I am not a lawyer. You should contact an attorney and discuss with her the particulars of your situation.

With that being said, as you may be aware, LLC is an acronym for Limited Liability Company. So the entire purpose of operating under an LLC is to avoid personal liability for the company’s debts. So to answer your question, the general answer would be “no”.

However, there are three major exceptions:

  • If you gave any personal guarantees for the LLC’s debts (which most banks will insist on if the business loan is large), then you are personally on the hook.
  • If your personal conduct was determined by a court of law to be especially egregious resulting in losses for your creditors, the LLC may not protect you. The legal term for this concept is called “piercing the corporate veil”.
  • In Canada, if you are a director of the corporation, you are personally liable for obligations created by statute such as unremitted payroll deductions for income tax and government pension contributions, unpaid employee wages, and unremitted sales taxes. I’m assuming that there would be similar laws in the United States (which is where I assume you are located).

You also have to consider your own personal reputation. Do you plan to start a new company in the same industry? Because even if your corporation’s creditors cannot touch your personal assets, your reputation will be such that suppliers and financiers in your industry will no longer want to deal with you. You look at someone like Donald Trump who had multiple bankruptcies (through his corporations) and has accumulated a questionable reputation among lenders, tradespeople and suppliers in the real estate industry. Some food for thought.

business bankruptcy

What happens to a person whose business goes bankrupt?

Business bankruptcy question: a Quora user asks: What happens to a person whose business goes bankrupt?

Victor Fong, Licensed Insolvency Trustee in Toronto, Canada replies:

In Canada, if you are incorporated, then you are not responsible for the corporation’s debts. There are however 2 major exceptions:

1. If you are a director, you are personally responsible for unpaid wages & vacation pay, unremitted payroll taxes and unremitted sales taxes that were left unpaid from the distribution of the corporate assets (if any) by the bankruptcy trustee.

2. If you signed any personal guarantees for the corporation, you will be personally liable if these debts remain unpaid from the corporate bankruptcy proceedings.

More often than not, the business was also the owner’s sole source of income. So the business owner has most likely accumulated a lot of personal debt to finance his living expenses because he wasn’t earning enough money from the business. So in my experience, the business owner will usually file for personal bankruptcy alongside the bankruptcy of his business corporation.

trustee goes bankrupt

What happens when a trustee goes bankrupt?

From Reddit – StormCrow17702 asks: What would you do if you went bankrupt?
Hi Storm Crow,
This is an interesting question, but in my case it’s purely hypothetical since I literally have no debts at all. And if a person has no debts, he cannot go bankrupt.
But here’s a story to illustrate how a trustee can go bankrupt.
My first job when I moved to Toronto from Ottawa (my hometown) back in October 1997 was with bankruptcy firm. At that time, it was the largest consumer bankruptcy practice in the Greater Toronto Area, if not the entire country. They were doing a booming business because Canada was still mired deep in a recession that started with the real estate downturn in 1989.
They spent a lot of money on advertising: Yellow Page ads (when physical phone books still existed), TV commercials, radio ads, etc. And they hired a lot of staff and paid a lot for rent because they had offices all over the GTA and eventually expanded into British Columbia.
They got the money to finance all these expenses from one of the big Canadian banks. If I recall correctly, this firm was indebted to the bank for millions of dollars at their peak.
When the economy started improving and the firm started getting less business, they could not keep up with the loan payments to the bank and eventually defaulted. The bank obtained a bankruptcy order against the firm and it became bankrupt. The court appointed one of the big 4 accounting firms to act as trustee of the firm’s bankruptcy proceedings and receiver of its assets.
So what happened next? Well, the Office of the Superintendent of Bankruptcy stepped in and froze all of the firm’s trust accounts and took over the signing authority for these accounts from the owners of the firm. That is, the OSB stepped in to protect these funds from potentially being misappropriated by the firm’s owners. This was called a “conservatory measure” under the Bankruptcy Act. The firm’s files were eventually sold by the firm’s trustee to another Toronto bankruptcy practice for not a lot of money. So the bank recouped some of its loan, but suffered a significant shortfall.
As expected, the bank was livid, and went after one of the firm’s owners by obtaining a bankruptcy order against him (he had given a personal guarantee to the bank for his firm’s business loan). To my knowledge, he never practiced bankruptcy again (I believe he lost his license as a result of his personal bankruptcy).