A limited liability company (LLC) is a very common type of business structure that incorporates attributes from both a corporation and a partnership. Because state law governs these types of business entities, each state has its own default rules regarding how to divide such an entity properly. The division process ends the business by distributing any profits to its owners, called members, which is also known as winding up, termination, cancellation, and dissolution of a business. Generally, the business's governing documents describe the procedures that it should follow in the event the members decide to shut down the company for whatever reason, so it does not have to follow the default laws.
LLC Basics and Membership Agreements
An LLC is somewhat of a hybrid between a partnership and a corporation. Like a partnership, members have increased flexibility when it comes to managing their business. For example, there are no requirements to have a board of directors or annual meetings. Like a corporation, members are provided with personal liability protection, which means a member's personal assets cannot be used to settle any of the LLC's debts or obligations. These features are very attractive for entrepreneurs just starting their business.
While operating agreements and state laws differ, typically members must unanimously agree to divide the company. In the event the decision is not unanimous, there may still be ways to move forward. For instance, members who do not want to end the business could buy out the withdrawing members. The potential solutions depend on the operating agreement and the laws of the state.
Operating Agreement as Governing
While not required, LLCs typically create an operating agreement that functions similarly to a corporation's bylaws. The operating agreement can include a number of things, including members' roles and responsibilities, what circumstances require a formal vote, and the procedures for dissolving the business.
If there is an operating agreement, the state treats it as binding and directs the members to follow the procedures set forth in the document. If the company does not have an operating agreement or if the document does not address dissolution, the state's default rules apply.
Financial Obligations and Dissolution Documents
Before the LLC can dissolve, it must pay all of its creditors and balance members' accounts. It must repay any members that loaned the business money and collect any loans that were extended to any members. After settling all its obligations, the company must distribute any remaining business assets to its members. The members can determine whether or not to liquidate those assets or keep them whole. Generally, but not always, the remaining assets are distributed to each member based on the percentage of the company they own.
States require you to file dissolution paperwork before you can officially close an LLC. Filing procedures vary, with some states having a specific document to fill out while others provide a suggested format. Check with your state's agency that regulates businesses to determine its requirements.
Dividing an LLC is often complex and can take longer than expected. As long as you're in compliance with either the business's operating agreement or the state's laws if there is no document, then you'll be able to legally divide and shut down your business properly.
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