Business Credit Cards and LLC Bankruptcy - Are You Personally Liable?

Here is the scenario: Your limited liability company (LLC) has built up a heavy load of credit card debt, and, for this and other reasons, it must file bankruptcy. Are the members of the LLC personally liable for the credit card debt?

The answer is simpler than you might think. Remember that a LLC stands for "limited liability company," which means that the liability of the owners for the debts of the business is limited. That's why you formed the LLC in the first place. An LLC, like a corporation, is a separate business entity from its members (owners), which protects the owners, who are liable only to the extent of their personal investment in the business. This is what's called the "corporate shield" or "corporate veil" and it applies to LLCs as well as corporations.

BUT, there are three circumstances under which you would be liable for the credit card debts of the LLC:

1. If you personally guaranteed the debts of the business. In this case, your personal guarantee overrides the limited liability protection. Read the fine print in your credit card statement.
   
   
2. If a statute requires the business owners to be liable for certain types of debts. For example, in some states (Louisiana is one example) officers are liable for unpaid employment taxes. And the IRS can penalize officers who fail to pay employment taxes (called the Trust Fund Recovery Penalty).
   
   
3. If you failed to keep your business and personal finances separate. Don't pay business bills from your personal account, or personal bills from your business account. Keep separate checking accounts. If you have a home business, be careful how you determine your home business deduction. Intermingling business and personal expenses and income negates the liability protection, because the business is not clearly a separate entity.

Now, don't go out running up big business credit card bills, thinking you will be able to get out of paying them if your business goes bankrupt. Irresponsible use of credit card debt could be considered "gross negligence," and it still might get you in trouble with the bankruptcy court. And, after all, our credit card "habit" is what got all of us in this mess in the first place.