How Bankruptcy Affects Business Partners and Co-Owners
When a business operates with partners and has more than one owner, bankruptcy can affect far more than the company’s outstanding bills. How bankruptcy affects business partners and co-owners depends on who files, how the business is organized, whether owners personally guarantee debts, and what rights each partner and co-owner has under the company’s governing agreements.
These questions can become especially important when one owner wants to reorganize while another wants to close the business or when creditors can pursue individual owners. Weintraub Zolkin Talerico & Liu LLP helps businesses and their owners evaluate reorganization, liquidation, debt restructuring, and other financial options. Our Los Angeles business bankruptcy lawyers can help clarify how a potential filing may affect both the company and its partners or co-owners.
Business Structure of Partnerships and Co-Ownership
The business entity can make a major difference in whether other owners remain responsible for company debts.
General Partnerships
California Corporations Code § 16306 generally provides that partners in a general partnership are jointly and severally liable for partnership obligations, subject to statutory exceptions. As a result, a partnership’s financial problems may create direct exposure for its general partners.
In a Chapter 7 bankruptcy involving a partnership, 11 U.S.C. § 723 may also permit the trustee to pursue a general partner for a deficiency when that partner is personally liable under applicable nonbankruptcy law.
LLCs and Corporations
LLCs and corporations generally provide greater separation between business liabilities and owner liabilities. California law provides, for example, that an LLC’s debts do not become a member’s debts merely because that person is a member or manager.
However, that protection does not eliminate every risk. An owner may still face personal responsibility after signing a personal guarantee, pledging personal property as collateral, becoming independently liable for misconduct, or assuming another contractual obligation.
The Automatic Stay May Not Protect Every Business Partner and Owner
Filing for bankruptcy usually creates an automatic stay, which stops many lawsuits, collection efforts, foreclosures, and other actions against the debtor or bankruptcy estate. The Central District of California similarly describes the automatic stay as protection against most collection activities directed at the debtor once a petition is filed.
For co-owned businesses, however, an important limitation is that the stay generally protects the debtor, not every person connected with the debtor. For example, if an LLC files Chapter 11 but one member personally guarantees a bank loan, the lender may still have rights against that nonfiling guarantor. Likewise, a business filing does not automatically stop proceedings involving non-debtor partners or co-owners merely because they share ownership of the company.
That distinction should be reviewed before filing rather than after creditors begin pursuing other parties.
Bankruptcy Can Affect Ownership and Control of the Business
Bankruptcy in California can also change the relationship among owners, even when a co-owner is not personally responsible for the debt.
In an individual bankruptcy, the debtor’s ownership interest may become part of the bankruptcy estate. In a business Chapter 11 case, existing owners may retain management responsibilities while the business reorganizes, but their economic interests can be affected by the eventual restructuring plan.
Business owners should also expect increased financial disclosure. Central District of California filings address related bankruptcy proceedings involving affiliates, partnerships, general partners, and other persons in control. These requirements illustrate why financial connections among related businesses and owners need to be identified early.
Not Sure How Bankruptcy Will Affect Your Business Partners and Owners?
Bankruptcy involving a jointly owned company requires careful attention to the debtor’s identity, business structure, personal guarantees, ownership rights, creditor claims, and the responsibilities of each partner or co-owner.
Weintraub Zolkin Talerico & Liu LLP can help businesses evaluate how a filing could affect the company, its partners, and its co-owners before major decisions are made. Speaking with our bankruptcy lawyers in Los Angeles can help you assess both the immediate financial problem and the longer-term implications for business partnerships, ownership, and liability.
Call us at (310) 207-1494 or request a consultation with one of our bankruptcy lawyers to evaluate your case.