How can employees recover wages from an LLC that is going out of business?
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UPDATED: Jul 14, 2021
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The purpose of a limited liability company is to insulate its owners from the debts, liabilities, and obligations of the company. While there are very limited exceptions to this, they tend to fall under the following three categories:
- Certain tax liabilities, which the government really wants to make sure it collects.
- Any liabilities which the owners have personally guaranteed (e.g. banks and other creditors or lenders often require the owners of small businesses to personally guarantee loans and lines of credit). It is very unlikely that the business owner has executed any documents guaranteeing employee wages.
- If the “corporate veil” can be pierced. (Even though an LLC is not a corporation, they use the term “corporate veil.”) This can be done IF it can be shown the business structure was not actually a “real” business or entity, but was simply a pretext used in a deliberate attempt to defraud creditors, vendors, business partners, etc. Note that this is almost impossible to do—there is a very strong presumption that LLCs and corporations are valid, since to presume otherwise would be to essentially destroy their utility
Apart from these very limited exceptions, though, the obligations of the business do not become the obligations of the limited liability company’s owners. They are protected from actions by creditors of all kinds, including, unfortunately, employees.
That does not mean that the employees may not be able to recover something from the out-of-business LLC. If it has any assets, including accounts receivable (cash coming in), if the LLC is sued (assuming that, while it is out of business, it still exists), then it may be possible to recover at least part of any wages due. If the LLC is owed any money for any legal claims or lawsuits it may have brought, that may also represent a potential source of recovery.
In a situation like this, the employees should consult with an attorney to determine their rights, recourse, and likelihood of getting any meaningful recovery. In the meantime, they should also apply for unemployment compensation, since their employer has gone out of business.