Legal Question in Business Law in California

Transfer of liability

My partner and I bought a restaurnat. We have just received our LLC filings. How do we transfer our personal debt incurred by buying the restaurant to our LLC? Thank you.


Asked on 1/28/03, 2:12 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Transfer of liability

In the first place, if you and your partner assumed personal liability on notes or other obligations as part of the purchase price or as payment for any other pre-LLC costs, you cannot simply transfer those obligations to the LLC. At best, your creditors might be willing to exchange their claims against you personally for new notes or the like showing the LLC as the debtor, but they are very likely going to be unwilling to do that unless the LLC has a lot of assets and/or a stellar credit rating, which is in turn unlikely at this stage.

The principle here is that people who advance money or other assets to a new business will almost invariably seek a personal guarantee from the borrower(s) or purchaser(s). It doesn't matter if the business entity is a corporation, LLC or something else, the creditor wants the assurance of payment that a personal guarantee delivers. However, this general rule does not preclude your negotiating with the seller or lender. Just keep in mind it's unlikely to happen.

Next, I advise that you read your LLC operating agreement carefully. Especially if it was prepared by your lawyer, it is likely to contain a section covering the members' or managers' obligations for capital contribution. If there is a provision, follow it closely in capitalizing the LLC (putting in money, assets, etc. such as by showing that the LLC is the owner of the restaurant business). If you have an accountant, she or he can give you some guidance on the proper book entries to set up the LLC's ledger to reflect its acquisition of the business, and its corresponding obligation to pay the debts (even though you may remain personally liable).

If your LLC operating agreement does not cover capital contributions, you should ask why, and have whomever drafted it insert them, and re-sign when you are satisfied. If you don't understand the process of capitalizing the business, get some professional guidance from a lawyer and/or an accountant.

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Answered on 1/28/03, 3:34 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Transfer of liability

I should supplement my previous answer by adding that, as part of the process of capitalizing your new LLC, you can delegate payment of the personal debts to the LLC. This does not get you and your partner off the hook, i.e. you remain liable, but when you notify the creditors of the delegation, they should look primarily to the LLC and regard you individually as a co-debtor or surety.

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Answered on 1/28/03, 4:10 pm


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