Why Dissolve a Limited Liability Company

By Jeff Franco J.D./M.A./M.B.A.

A limited liability company’s dissolution is the process of permanently winding up the affairs of the LLC. Once dissolution occurs, the LLC is no longer a legal business entity. However, members are free to create a new LLC and operate a business that is identical to the dissolved LLC. Each state has numerous circumstances and events that may warrant LLC dissolution.

A limited liability company’s dissolution is the process of permanently winding up the affairs of the LLC. Once dissolution occurs, the LLC is no longer a legal business entity. However, members are free to create a new LLC and operate a business that is identical to the dissolved LLC. Each state has numerous circumstances and events that may warrant LLC dissolution.

Members

The members of the LLC can make the decision to dissolve the LLC and cease all operations of the business if there is unanimous consent to do so. A vote to dissolve the business can be for any reason, regardless of profitability. The LLC automatically ceases to exist if during any consecutive 90-day period the LLC has no members. Most state statutes allow for dissolution if a member dies, enters personal bankruptcy proceedings or otherwise becomes incompetent. However, remaining members have the authority to continue the LLC and its operations if all members agree unanimously.

Ready to start your LLC? Start an LLC Online Now

Operating Agreement

The operating agreement of the LLC is binding on all members. If the agreement provides that dissolution will occur by the happening of a particular event, the occurrence of that event is grounds for dissolution and requires a winding up of LLC affairs. However, an LLC operating agreement is subject to amendments if a sufficient number of members vote in favor of amending it. Therefore, dissolution is not mandatory on the occurrence of the event if immediately after members amend the clause requiring dissolution. The operating agreement will also provide the number of member votes that are necessary to amend the agreement. This clause of the agreement remains binding on the members even if facing an imminent dissolution. For example, if a unanimous vote is required for amending the agreement, a single member can enforce the dissolution by voting against the amendment.

Unlawful Business Activity

Any member of the LLC may appeal to a court to order the dissolution of the LLC on the basis that all or a substantial amount of the activities the business engages in are illegal. In addition to the submission of evidence proving the illegal activity, the member must provide reasonable explanations why it is necessary to dissolve the LLC rather than continuing to carry out only lawful activities pursuant to the LLC’s operating agreement.

Illegal Management

A member of the LLC can also request a state court intervene and order a dissolution if the managers or members in charge of managing the operations are using the LLC to engage in unlawful activity or to promote fraudulent business dealings. Court intervention is available even if the management has yet to commit an illegal or fraudulent act, but there is sufficient evidence that fraudulent or illegal activities are imminent. In the absence of fraud and illegality, a member may also request dissolution from a state court judge if the members and managers who have authority to manage the LLC’s operations are acting in a manner that is oppressive and potentially harmful to the member’s interests.

Ready to start your LLC? Start an LLC Online Now
Business Life Cycles of an LLC

References

Related articles

What Are the Advantages of an LLC in Michigan?

There are a number of advantages to forming a Limited Liability Company (LLC) in Michigan. Michigan changed its laws related to LLCs in 1997 in order to create a more favorable business climate in the state and in doing so, it adopted a number of rules that make forming an LLC in Michigan easier and cost effective for more types of businesses.

What Happens if You Breach an LLC Operating Agreement in California?

Unlike a corporation, which must have a board of directors, the members of an LLC are free to determine how an LLC will be structured and operated through executing an operating agreement. In California, an LLC member who breaches an LLC operating agreement is liable to the LLC for any economic consequences resulting from the breach.

The State Requirements for an LLC

Each of the 50 states and the District of Columbia govern all aspects of limited liability company business structures. Each jurisdiction imposes separate bodies of law that provide the requirements to which an LLC must adhere. However, as most states adopt some form of the Uniform Limited Liability Act, only slight differences across jurisdictions may exist.

LLCs, Corporations, Patents, Attorney Help

Related articles

How Long Can an LLC Operate?

One of the notable benefits for creating a limited liability company for your business is its inherent indefinite life. ...

LLC Rules & Guidelines

Entrepreneurs who wish to create a limited liability company for their business must adhere to the prevailing laws of ...

Reasons for Voluntary Dissolution of LLC

A limited liability company, or LLC, is legally formed once the initial articles of organization are filed by the ...

How Does an LLC Work?

The state in which you create your limited liability company will impose minimum requirements and standards you must ...

Browse by category