QUESTION
Is it illegal for a person who runs a business as a sole proprietor to convert his business to a LLC and then file bankruptcy?
Asked on May 01st, 2014 on Bankruptcy - California
More details to this question:
I am almost 60 years old and became disabled in 2010. I have spent the last 4 years trying to keep my small business afloat, however due to my disability I have only managed to get deeper in debt.
9 ANSWERS
Bankruptcy Attorney serving Dallas, TX
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Polk & Associates
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No, it's not necessarily illegal to convert a sole prop to an LLC. However:
1) it can be a problem when the only reason for doing it is to file a bankruptcy; and
2) in the usual situation you won't gain anything by doing that so usually you wouldn't bother to go through all that extra work.
Answered on May 02nd, 2014 at 9:48 AM
Debt Settlement Attorney serving Chicago, IL
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Law Offices of Daniel J. Winter
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There are many factors in deciding how to continue a business and having to deal with debt and possible bankruptcy. You need to call an experienced attorney to discuss your options while dealing with your whole financial situation.
Answered on May 01st, 2014 at 4:42 PM
No, it is not illegal but you must understand that the LLC is viewed as your asset if you file a personal bankruptcy, so moving assets into an LLC won't necessarily protect them from your creditors. An LLC is designed to limit your personal liability for business debts, but would be of very limited value if you incurred those debts before forming the LLC. If you are planning to file a Chapter 7, most trustees prefer that you shut down your small business entirely when you file. Then, if you want to start the business back up again after bankruptcy, it might make sense to create the LLC at that time.
Answered on May 01st, 2014 at 3:29 PM
Bankruptcy Attorney serving Seattle, WA
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The Law Office of Marc S. Stern
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Illegal, no. A good idea? Maybe. This is something that needs to be discussed with a competent bankruptcy attorney well in advance of doing anything.
Answered on May 01st, 2014 at 3:18 PM
Bankruptcy Attorney serving Santa Rosa, CA
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Law Offices of Craig Burnett
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No, but doing so does not insulate you or your (former) sole proprietorship from liability.
Answered on May 01st, 2014 at 11:27 AM
Litigation Attorney serving San Antonio, TX
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Graves Law Firm
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Not illegal, but it won't solve the problem of personal liability for your existing business debts. See a bankruptcy lawyer. Most charge nothing for a consultation.
Answered on May 01st, 2014 at 11:12 AM
It is not illegal to change a businesses structure just before filing bankruptcy, but it may not be necessary and it also may harm the person who has done this by making the assets less protected in the bankruptcy filing. Bankruptcy exemptions provide for a substantial amount of protection of business assets, called "tools of the trade" if personally owned.
Answered on May 01st, 2014 at 11:11 AM
Bankruptcy Attorney serving Livonia, MI
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Charles J. Schneider, P.C.
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No in general if there is a good business purpose behind it and it is not used to defraud creditors, shield assets etc. it would be OK.
Answered on May 01st, 2014 at 10:27 AM
Bankruptcy Attorney serving Walnut Creek, CA
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Alan E. Ramos Law Offices
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Converting to an LLC now would only provide liability protection from future debts (debts incurred by the LLC). All existing debts are your personal obligation and liability could not be transferred to the LLC. You should have a conversation with an attorney before you start taking action.
Answered on May 01st, 2014 at 10:17 AM