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? 22 Answers as of June 04, 2014

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.

Ask a Local Attorney. 100% Anonymous. Free Answers.

Free Case Evaluation by a Local Lawyer: Click here
David R. Fondren, Attorney at Law
David R. Fondren, Attorney at Law | David R. Fondren
It is not illegal. But, it will not change anything. You still own the business and the LLC. It is an asset that is also part of your bankruptcy estate. You need to discuss this with an attorney to determine if it is something the trustee will want to liquidate.
Answer Applies to: Missouri
Replied: 6/4/2014
The Law Office of Darren Aronow, PC
The Law Office of Darren Aronow, PC | Darren Aronow
Yes, you can as long as you are not hiding assets. And just because you have a LLC does not mean the assets can not be seized by the trustee if they are not exempt. You should speak to a local attorney in more detail about your case.
Answer Applies to: New York
Replied: 5/2/2014
214bankruptcy.com
214bankruptcy.com | Rustin Polk
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.
Answer Applies to: Texas
Replied: 5/2/2014
Stephens Gourley & Bywater | David A. Stephens
No it is not illegal, but it may not work either.
Answer Applies to: Nevada
Replied: 5/1/2014
Law Offices of Daniel J Winter
Law Offices of Daniel J Winter | Daniel J Winter
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.
Answer Applies to: Illinois
Replied: 5/1/2014
    EDWARD P RUSSELL | EDWARD P RUSSELL
    You can begin a corporation and then file a personal bankruptcy. If you do that then your personal liability would be discharged but not the debts of the corporation. If you filed a personal bankruptcy and you are a sole proprietorship then all the debt, yours and that of the business are discharged.
    Answer Applies to: Minnesota
    Replied: 5/1/2014
    Law Offices of Linda Rose Fessler | Linda Fessler
    You do not have to convert it to file. If you do they will want to know why, and the answer may cause you problems.
    Answer Applies to: California
    Replied: 5/1/2014
    Law Office of Michael Johnson
    Law Office of Michael Johnson | Michael Johnson
    No but the debt you incurred as a sole proprietor does not just convert to the business, it is yours personally. You need to contact an attorney to discuss.
    Answer Applies to: Florida
    Replied: 5/1/2014
    Garner Law Office
    Garner Law Office | Daniel Garner
    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.
    Answer Applies to: Oregon
    Replied: 5/1/2014
    Danville Law Group | Scott Jordan
    It is legal to convert a sole proprietorship to a LLC and then file bankruptcy. Are you planning to file bankruptcy personally? What type of business do you have? Please feel free to call me to discuss further. I have represented clients in you similar situation and am familiar with the requirements to preserve your business.
    Answer Applies to: California
    Replied: 5/1/2014
    Marc S. Stern
    Marc S. Stern | Marc S. Stern
    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.
    Answer Applies to: Washington
    Replied: 5/1/2014
    The Law Office of Mark J. Markus
    The Law Office of Mark J. Markus | Mark Markus
    It's not illegal at all. It's done all the time, but must be done properly to avoid successor liability in the new corporation.
    Answer Applies to: California
    Replied: 5/1/2014
    LAW OFFICES OF CRAIG BURNETT | Craig Alan Burnett
    No, but doing so does not insulate you or your (former) sole proprietorship from liability.
    Answer Applies to: California
    Replied: 5/1/2014
    Law Office of Lynnmarie A. Johnson
    Law Office of Lynnmarie A. Johnson | Lynnmarie Johnson
    I am not sure if you are asking about you or the business filing bankruptcy. Either way, I assume you own 100% and probably have personally guaranteed the debt. If that is true, they are going to come after you either way. I would meet with an experienced business bankruptcy attorney before you do anything that could be construed as fraud or avoidance of debts that you will still be responsible for.
    Answer Applies to: Michigan
    Replied: 5/1/2014
    A Fresh Start
    A Fresh Start | Dorothy G Bunce
    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.
    Answer Applies to: Nevada
    Replied: 5/1/2014
    Graves Law Firm
    Graves Law Firm | Steve Graves
    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.
    Answer Applies to: Texas
    Replied: 5/1/2014
    Janet A. Lawson Bankruptcy Attorney
    Janet A. Lawson Bankruptcy Attorney | Janet Lawson
    If you do not have employees you can file bankruptcy without converting to an LLC. Converting to an LLC will not help you keep assets out of the bankruptcy. You will have to disclose what the LL owns as you own the LLC.
    Answer Applies to: California
    Replied: 5/1/2014
    Law Office of Andrew Oostdyk
    Law Office of Andrew Oostdyk | Andrew Oostdyk
    It is illegal if you are trying to hide assets from being disclosed. If you remain the sole owner of the business, there may not be a difference in effect between a sole proprietorship and an LLC when you file Bankruptcy. You should consult a Bankruptcy attorney to assist in filing your case, she will be able to analyze your situation and better answer your questions.
    Answer Applies to: Texas
    Replied: 5/1/2014
    Law Office of J. Thomas Black, P.C.
    Law Office of J. Thomas Black, P.C. | J. Thomas Black
    It would be possible to set up an LLC, but if I understand you correctly, the debt would still be in your personal name. Only if your creditors agreed to set up new accounts and look only to the LLC (unlikely), would you avoid liability. Moreover, LLC's and corporations do not receive a discharge in chapter 7 bankruptcy, so the creditors would be able to continue to collect against the LLC. I recommend that you consult with an experienced bankruptcy lawyer about your situation.
    Answer Applies to: Texas
    Replied: 5/1/2014
    Charles Schneider, P.C.
    Charles Schneider, P.C. | Charles J. Schneider
    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.
    Answer Applies to: Michigan
    Replied: 5/1/2014
    Meister & McCracken Law Firm, PLLC | Joanne M. McCracken
    You can file for bankruptcy as an individual sole proprietor and discharge your business debts. You should talk with a bankruptcy attorney who can give you specific advice based on your individual situation.
    Answer Applies to: Arkansas
    Replied: 5/1/2014
    Steele, George, Schofield & Ramos, LLP
    Steele, George, Schofield & Ramos, LLP | Alan E. Ramos
    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.
    Answer Applies to: California
    Replied: 5/1/2014
Click to View More Answers:
12 3 4 Free Legal QuestionsConnect with a local attorney