One of the primary reasons to operate your business as a limited liability company is to limit your exposure to the company’s liabilities. A related issue that is often overlooked is understanding the extent to which a limited liability company can be liable for the liabilities of a bankrupt co-owner. For example, if Walter and Jesse form Blue Sky Chemicals, LLC, a successful business operated as a limited liability company, and Walter encounters money difficulties and declares bankruptcy, to what extent can Walter’s creditors get to the assets of Blue Sky Chemicals, LLC? This is an area where state statutes on limited liability companies differ in some very substantive ways.
The first issue is whether Jesse has to dissolve Blue Sky Chemicals, LLC due to Walter’s filing of bankruptcy. Some state laws, including Delaware and New York, state that an LLC is not automatically dissolved due to a member declaring bankruptcy unless the LLC’s operating agreement provides otherwise. 6 Del C. § 18-801(b); N.Y. Limit. Liab. Co. § 701(b). Other state’s laws, however, provide that the LLC must be dissolved unless the operating agreement states otherwise. 15 Pa. Cons. Stat. § 8971(a)(4). In Georgia, for LLCs formed prior to 1999, if a member declares bankruptcy, such person ceases to be a member in the LLC and the LLC must be dissolved within 90 days unless the remaining members within the 90 day period elect to continue the LLC by written consent. O.C.G.A. 14-11-601. However, the operating agreement can provide for the continuation of the LLC notwithstanding a member’s bankruptcy. The Georgia Limited Liability Company Act was amended in 1999 to provide that the LLC does not automatically dissolve upon a member’s bankruptcy. O.C.G.A. 14-11-601.1; O.C.G.A. 14-11-602. Being compelled to dissolve a profitable LLC is usually undesirable. As a result, you should check your company’s operating agreement and the applicable state laws to ensure that your company can continue to operate even if another member declares bankruptcy.
For help ensuring your operating agreement protects you from another member’s bankruptcy, contact Douglas Park Law.