What is the impact of filing bankruptcy on the holder of an interest in an LLC/Partnership?

signingIf you are partner in a Partnership, filing bankruptcy will terminate (“dissociate”) you as a partner of the partnership. See, RCW 25.05.225(6)(a) (“A partner is dissociated from a partnership upon the occurrence of any of the following events: … (6) The partner’s … (a) Becoming a debtor in bankruptcy); RCW 25.05.015.

If you are a member of a Limited Liability Company (LLC), filing bankruptcy will terminate (“dissociate”) your management rights, etc. and reduce you to the status of an “assignee” unless either (a) your LLC Agreement provides otherwise or (b) you have written consent from the other LLC members that filing bankruptcy will not dissociate. See, RCW 25.15.130, RCW  25.15.250(2).

Please consider this in deciding whether you want to file for bankruptcy relief if you have an interest in an LLC or Partnership. If you want to continue doing business in the partnership or LLC after bankruptcy, you should make sure that the other business owner(s) agree that filing bankruptcy would not cause your “dissociation.” On the other hand, if you do not desire to continue business, it is a far less important issue. Sometimes, “dissociation” can get very messy and costs a lot of money. However, thankfully, sometimes not. You just need to understand that this is an issue when reviewing the pros and cons of filing.

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