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What debt am I liable for if we dissolve our CA LLC?

Los Angeles, CA |

I am the minority share holder of an LLC. The first company operated as a DBA under the majority share holders name. He accumulated approximately $80k in debt which was personally guaranteed by him. We then formed the LLC and he transferred that debt to the company.

He wants me out, but does not want to buy me out. If we dissolve the LLC, what debt would I be liable for? We have acquired very little new debt since the formation of the LLC.

More info: I had no involvement in creating the original debt. The majority share holder secured a personal loan and several lines of credit in his name, not the name of the company. When the LLC was formed, to the best of my knowledge this debt was simply included as a liability line item in the books. Sometimes the company made payments, sometimes the majority share holder made payments from their personal account or other business entity. After reviewing the operating agreement, I do not see any mention of specific liability or debt. The initial debt was essentially the start up costs for creating the product that went in to manufacturing.

Attorney Answers 4


What a mess. Personal debts don't get "transferred" to the company, so this never should have happened -what if anything did the company get in exchange for taking on this debt, an IOU? Why would you buy into a company that took on someone else's debt? This premise defies logic and no company would ever do this, since it's a breach of fiduciary duty to the LLC and to you as owner of the LLC.

You need a lawyer ASAP to address this inequity.

Avvo doesn't pay us for these responses, and I'm not your lawyer just because I answer this question or respond to any follow-up comments. If you want to hire me, please contact me. Otherwise, please don't expect a further response. We need an actual written agreement to form an attorney-client relationship. I'm only licensed in CA and you shouldn't rely on this answer, since each state has different laws, each situation is fact specific, and it's impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.

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The initial debt was essentially the start up costs for creating the product that went in to manufacturing. I knew that it was going on the books, but I never understood, nor was it explained, that I would become liable for it. Which is what he is now claiming. But it was NOT specifically recognized in the LLC Operating agreement, so then it would seem to me, that it was his personal guarantee and therefore I will not be liable. In fact, the only new debt in the company name is a personal loan made by me for the development of a new product and a small credit card bill.


I cannot answer this question without a lot more information. Normally an equity member of an LLC is not personally liable for the debts of the LLC. That is the main reason business men and women form LLCs. On the other hand there are a lot of possible scenarios that can change this result. What does the operating agreement say? What consideration did the majority member give to have the LLC assume his prior debt? Were you involved in that prior debt? What is the nature of that debt? Is there any equity or value in the LLC? I recommend that you consult a good business lawyer and let him review the relevant documents and get a lot more information.

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How do you "transfer" debt?

Did the company contract for it?

What was the consideration for assuming the debt?

Was a duty violated?

Is this a fraudulent transfer?

Is this fraud on a partner?

Are you now liable? Has he impaired the value of your LLC?

How are you going to dissolve it after it has "contractually agreed????" to have this "debt" transferred to it?

Since it has the debt via his own actions (conflict) will this hold up? If you sued him to dissolve, might the judge nullivy the "receipt" of the personal debt?

If the entity LLC has no assets, is it time to file chapter 7?

Many more questions your facts generate than I will have room to wonder about here.......

Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.

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You have not stated how much you invested, but since you talk about your other member "buying you out", I assume you must have invested something. Be that as it may:
1. Who ever had personal responsibility for debts incurred before organization of the LLC is still responsbile unless the Creditor agreed to release the original debtor and substitute the LLC. I doubt that would ever happen.
2. If you had nothing to do with the original debt, you have no liablily for that debt guaranteed by your fellow member.
3. You have no liability for debts incurred by the LLC after its formation if: a) you assumed no personal liability; b) the formalities of operating as an LLC were observed.
How much should you get paid for your interest? That will be determined by the negotiations between you and your other member. The fact that your fellow member has been paying off a personal debt with LLC funds does not inspire me with confidence unless that debt was incurred for the benefit of the company, in which case that would be reasonable. Apart from that, are you earning any money from the LLC? Your fellow member can determine your pay, and could fire you unless you have an employment agreement. The decision is yours!

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