How can employees recover wages from an LLC that is going out of business?

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.

Case Studies: Recovering Wages from an LLC Going Out of Business

Case Study 1: Recovering Wages Through Asset Liquidation

John worked for LLC, a construction company that recently filed for bankruptcy and went out of business. With unpaid wages totaling $5,000, John sought legal advice to explore his options.

After consulting with an attorney, he discovered that the company had some valuable construction equipment and vehicles that could be liquidated to pay off outstanding debts.

John, along with other affected employees, filed a claim against the company’s assets. Through the liquidation process, they were able to recover a portion of their unpaid wages.

Case Study 2: Recovering Wages From Pending Lawsuits

Sarah was an employee of LLC, a software development firm that abruptly closed its doors due to financial difficulties. Sarah and her colleagues were owed several months’ worth of wages.

After consulting with an employment attorney, Sarah discovered that LLC had initiated multiple legal actions against other companies for copyright infringement.

Recognizing the potential for recovery, Sarah joined forces with other affected employees and filed a claim against the pending lawsuits.

As the lawsuits progressed, the court ordered a portion of the settlement amounts to be allocated towards compensating the unpaid wages of the employees.

Case Study 3: Recovering Wages Through Employment Claim

Michael was employed by LLC, a marketing agency that suddenly ceased operations. Facing significant financial losses, Michael and his co-workers found themselves without pay for the last two months of work.

Upon seeking legal assistance, Michael learned that LLC had violated state labor laws by failing to provide proper notice or compensation upon closing the business.

With the guidance of an employment attorney, Michael filed a claim with the state labor department for unpaid wages and penalties.

Through the legal process, he successfully recovered the full amount of his unpaid wages, including additional compensation for the employer’s violation of labor laws.