How to Divide an LLC

By Heather Frances J.D.

Even if you’ve only been in business a short time, dividing your limited liability company can be complicated, since there is no one-size-fits-all solution. An LLC is a hybrid type of business entity that mixes features of a corporation and a partnership, which makes it flexible. LLCs are formed under the authority of state law, and each state’s LLC law has its own provisions to govern breaking up an LLC. States even have different terms to describe this event – winding up, termination, cancellation or dissolution.

Even if you’ve only been in business a short time, dividing your limited liability company can be complicated, since there is no one-size-fits-all solution. An LLC is a hybrid type of business entity that mixes features of a corporation and a partnership, which makes it flexible. LLCs are formed under the authority of state law, and each state’s LLC law has its own provisions to govern breaking up an LLC. States even have different terms to describe this event – winding up, termination, cancellation or dissolution.

Controlling Provisions

An LLC’s management structure is modeled after a partnership. The members may decide amongst themselves, through an operating agreement, how to manage their business and what will happen if they want to break up the LLC. If there is no existing agreement, or it does not address dissolution, the default provisions of the LLC’s state laws will apply.

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Agreement

Often, the LLC’s members must all agree to break up the LLC. If less than the entire membership wants to break up the company, the operating agreement may give the other members the right to buy out the withdrawing members. Without an agreement, the question of dividing the company may end up in court, with one member trying to force dissolution and the other members fighting to keep the LLC intact. Depending on the state, the court could force a buyout or supervise liquidation of the business.

Balance Accounts

Before your LLC can legally terminate, it must pay all its debts, including balancing every member’s capital account. Your state may even require you to include a statement about debts in your termination filing. Repay loans from members or collect loans extended to members, and pay off creditors.

Valuation and Transfer

The remaining business assets must be distributed to the LLC's members, which will require you to assess the value of those assets. Once the total value of the assets is known, the members can determine which assets they wish to liquidate and which will remain whole. Then, each member will be assigned cash or assets that equal his percentage interest in the company.

Dissolution

The LLC will need to file the proper dissolution paperwork with the state to formally terminate the LLC. Some states, like Georgia, provide a suggested format for dissolution filing. Others, like California, require specific state-issued forms which you can obtain from the Secretary of State. Final federal and state tax returns must also be filed. Since an LLC may choose to be taxed as a partnership or a corporation, the LLC must file the proper forms for its tax situation. For example, if the LLC is taxed as a partnership, the LLC must distribute final K-1 forms to the members.

New Business

If any member wants to continue operating as a business after dissolution, he will have to form a new LLC or other business structure.

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LLC Terms

References

Related articles

Oregon LLC Dissolution Forms & Instructions

In Oregon, a number of events may trigger the dissolution of an LLC. The members of an LLC can agree to dissolve the LLC . A judicial order may require dissolution of the LLC. Or the LLC may need to file Chapter 7 liquidation bankruptcy. Finally, the LLC's articles of organization or operating agreement may specify certain events that trigger the automatic dissolution of the LLC, such as a departure of one of the members.

Maryland's LLC Dissolution Law

By properly dissolving your limited liability company, you can ensure that creditors and state agencies are notified and your finances and professional reputation are protected. An LLC is a common business structure that combines the management flexibility of a partnership with the limited liability of a corporation. The operating agreement or articles of organization may provide when and how the LLC may be dissolved and how you should distribute its assets. Maryland law regulates how LLCs are dissolved if not spelled out in the operating agreement.

Do I Have to Dissolve My LLC if My Partner Is Insolvent?

Limited liability companies have certain advantages, such as allowing owners to enjoy liability protection similar to a corporation while being taxed like a partnership, thus avoiding double taxation. But an LLC also has disadvantages, such as when one member, or owner, becomes insolvent and has to declare bankruptcy. Even if there are only two members in an LLC, one member becoming insolvent doesn't necessarily mean that the LLC has to dissolve, but it can cause problems. Because an LLC is an independent legal entity formed under state laws, those laws dictate what follows.

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