If a individual files bankruptcy and owns an interest in a corporate entity or limited liability company, then the bankruptcy trustee steps into the shoes of the debtor and inherits the debtor’s rights. However, the rights of the trustee will be limited by the Articles of Incorporation and whatever Operating Agreement is in force at the time the debtor files bankruptcy. The trustee cannot exercise more rights over the company than the debtor; thus, if the debtor does not have the right to force a liquidation of the company, then neither can the Bankruptcy Trustee. If the company was properly formed and has an operating agreement, most operating agreements have provisions to deal with a part owner’s bankruptcy (e.g. automatic revision of the shares to the corporation etc). But if the business entity has only one owner, then the bankruptcy trustee can easily liquidate the business if there is a reason to do so.
Generally speaking, unless the Corporation or LLC owns tangible assets (cars, trucks, fixtures, inventory etc) or has significant cash flow or accounts receivables with few expenses or business debt, bankruptcy trustees take little interest in a debtors corporation.
Tags: Bankruptcy, business, corporation, limited liability company, LLC, trustee
