Business Debt Relief for an LLC: 5 Liabilities to Separate Before Negotiating

One of the first things anyone starting a business is told is “Get an LLC” or some similar incorporation. The good news is that this can be a great way to protect your personal assets in a lot of scenarios, but the protection isn’t automatic: the business owner isn’t usually protected from their personally guaranteed debts. Before you begin settling business debt, it’s important to know what’s really out there. One good way to start is to sort your liabilities into five categories. There are the big loans and cards you’ve signed off on, possibly a lease guarantee, SBA or EIDL debt you borrowed during Covid, a merchant cash advance that might have taken a lien on the business, and often a stack of payroll tax debt from the IRS. Any of those could follow the LLC owner once the business is gone.

Personal guarantees are debts that you’ve agreed to pay out of your own pocket if your business can’t. So while the business may be able to close, the debt stays with the owner. Anyone who works with debt collections or attorneys knows that a business entity is often not enough to stop a debt collector from pursuing the owner’s personal assets.

You may have signed personally for things like loans or credit cards, thinking the debt was just with the business. If the debtor defaults and the creditor sues, a personal guarantee means that the creditor can try to collect on that debt with personal assets or ask for a wage garnishment. Consider getting a professional to look at your documents before you assume there isn’t a personal guarantee.

And this can add up. One bar owner signed on for a $610,000 bank loan, a $110,000 merchant loan, and a $50,000 credit card. The lease for the bar’s space had his guarantee, too, for $26,000 per month.

A lease guarantee can sneak up on the business owner because it’s often seen as a sort of non-debt: after all, the owner may be signing for a lease, but they’re not asking the landlord to lend them any money. But make no mistake: A lease is a debt the landlord expects you to pay with the rent check each month. A personal guarantee for a business lease is basically the same as any personal guarantee: if the company doesn’t pay, the lease holder will ask for personal assets.

Even if a business closes, the lease doesn’t, and a landlord could sue the guarantor for the entire remaining balance. Consider a preschool owner who owed over $330,000 in lease arrears. This preschool owner had another issue: the business had taken an SBA loan, and she had signed that personally.

But don’t think it’s all corporate loans and credit cards. The government can get into the personal guarantee act, too. Most SBA loans require a personal guarantee from every owner with a 20% or greater stake. Covid EIDLs required guarantees if the amount was over $200,000. And if a borrower defaults, the government can pursue that guarantor personally.

If an SBA loan default happens, the government will pay off the bank and become the creditor. From there, the debt could be sent to Treasury. That opens up options like taking a tax refund or garnishing wages. After September 2025, EIDL loans in default started going to the Treasury for collection, and they cannot be sent back to the SBA.

Your business may also have taken one or more merchant cash advances. Many of these advances had a personal guarantee. And often, the lender filed a UCC lien. If the business defaults on its repayment, a lender with a lien can seize the assets as collateral without having to go to court, though it can’t break the peace by taking things by force. Some of these loans have a daily ACH agreement so that every day the money gets taken out of the owner’s account. Those daily payments can cause a cash-flow spiral, and owners frequently take new advances to pay off the old ones, making the problem even worse.

When a business fails to pay federal employment taxes, the IRS considers it a serious matter. The trust fund recovery penalty, or TFRP, is the agency’s way to hold the responsible person in charge personally liable for those unpaid taxes. IRS code allows this when it believes that an owner “willfully” failed to pay payroll taxes. One important fact about the TFRP: it is a 100% penalty, meaning it equals all the withheld trust fund taxes that weren’t paid. When the IRS assesses it, they usually first mail Letter 1153. Once that’s sent, you’ll have 60 days to respond or appeal. Don’t miss it. Single-member LLC’s are ignored for income tax, but since 2009 they’ve been separate entities for employment taxes. Their name and tax ID are their own.

Personal guarantees can be the scariest problem in a business closure. Some can be settled outright for a reduced amount. Some can be repaid on a structured repayment plan, and some can be worked out through a deal the creditor offers. A lot depends on the creditors, and the strategies change depending on who you’re facing. But the rule is always the same: the earlier you tackle it, the more options you have. Personal guarantees become a lot harder to deal with once there are lawsuits and judgments involved.

Keep in mind that settled debts can be counted as taxable income. If a lender accepts less than the full amount owed, it often has to file a 1099-C if the debt it’s forgiving is $600 or more. This tax “debt forgiveness” can be excluded from your taxable income if you’re insolvent - but only to the extent that you are insolvent personally. The business’ insolvency does not count, even for an LLC, so while settling debt can be beneficial, the LLC owner can end up with a tax debt that follows them home.

If a business can’t settle, a Chapter 7 for the LLC alone is often not a solution. That would usually leave personal guarantees untouched. A Chapter 7 can discharge most debts if the guarantor personally files it, but priority taxes are not dischargeable. And keep in mind that liquidating assets without planning with a professional first can be a bad strategy.

Sorting the business’s liabilities into the five types above can help you deal with them more quickly and effectively. Knowing where you are with each one can let you settle them as fast as possible.