Legal Ramifications of Dissolving an LLC

by John Cromwell

A Limited Liability Company (LLC) is an organization that combines features of a partnership and a corporation. Like a partnership, the owners of the LLC pay tax on the business’s income. Also like a partnership, an LLC has few formal management restrictions. Like a corporation, an LLC protects its owners from being personally liable for the business’s liabilities. LLCs are governed by state law, so if an LLC dissolves the process is defined by the state where it was organized. While there are general trends that are consistent, regardless of where the LLC is located, the specific steps for dissolving an LLC will vary by state. Before dissolving an LLC, check the laws of the state where it is located.

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Reasons for Dissolution

An LLC can be dissolved for one of four reasons. First, if the articles of association, which create the LLC, state that the business is only to exist for a certain amount of time and that time passes, the LLC will dissolve. Second, if the LLC transforms and begins operating in a way that is significantly different from its original purpose, the business must dissolve. Third, to terminate an LLC for the owners, (otherwise known as the LLC's members), is to agree to dissolve the business. Fourth, a court may order the business to be dissolved, if the LLC begins participating in illegal or fraudulent activity.

Winding Up

Even after termination, an LLC still has responsibilities it must meet. States generally require a business to satisfy all outstanding debts. When winding up, some states also require the LLC to set aside funds as a reserve for obligations it may have, but of which it is not aware. These states generally require the LLC to publish a notice in a local newspaper, stating that it is going out of business and that potential creditors should file their claims with the business, before a certain date. These debts are paid out of the reserve. Generally, any claim that is not presented to the LLC within five years is declared void and the creditor will not receive compensation. After the business’s liabilities are paid, the LLC distributes what remains of its property to the owners, based on their investment in the business.

Liability

Generally, the LLC and, by extension, its owners, remain liable for business liabilities until the business is properly wound up. The time span for barring potential claims does not begin until the state’s standards are properly met. For example, if an LLC does not properly comply with a state’s dissolution’s standards and a possible creditor claims the LLC owes him money ten years after the LLC ceases operation, the creditor could still reclaim what is owed.

Filing State Documentation

After it has been established that the LLC must be dissolved, either by agreement or court order, LLC members generally must file documentation with the state signifying its intention to terminate. The name of this form will vary by state. Some states will call it a Certificate of Termination, while others may call it Articles of Dissolution. Regardless of the name, the LLC must certify that its debts are paid, that there is no pending litigation against it and that all remaining assets have been distributed. Generally, the document must be signed and dated by an officer or member of the LLC.