What Does an Automatic Dissolution of an LLC Mean?

By Edward A. Haman, J.D.

What Does an Automatic Dissolution of an LLC Mean?

By Edward A. Haman, J.D.

Certain actions may result in the automatic dissolution of a limited liability company (LLC). To better understand how this works, you'll want to understand the larger picture.

Buisness people pointing at a computer

Voluntary and Involuntary Dissolution

It is most common for an LLC to be organized to run continuously, or until the members agree to terminate the business through what is known as a "voluntary dissolution." The members might reach an amicable, mutual agreement to end the business, or they might decide on dissolution as a result of disagreements among them.

There are several other ways an LLC might be dissolved, which are sometimes grouped under the heading "involuntary dissolution," also known as "automatic dissolution."

Types of Involuntary (or Automatic) Dissolution

Involuntary dissolution may be planned or unplanned.

Automatic Dissolution by Agreement

Sometimes an LLC is formed to last until a certain date, or until a certain event occurs. In this case, the articles of organization or the operating agreement will specify when the LLC will end. As an example, an LLC might be formed for the purpose of organizing and holding a certain event (such as a sporting event or a concert). The LLC automatically dissolves when the event is concluded. Or an LLC could be formed for the purpose of constructing and selling a building. The operating agreement would state that the LLC is dissolved upon the sale of the building.

Automatic Dissolution by Operation of Law

Some state laws provide for automatic dissolution if the LLC's structure changes (for example, from member-managed to manager-managed), if there is a merger, or if a member leaves or dies. However, it is usually possible for the LLC operating agreement to have provisions for the continuation of the business in the event of a member's withdrawal or death.

Administrative Dissolution

State law may specify that the agency regulating LLCs can force dissolution if the LLC fails to pay taxes, to file annual reports, or to maintain licensing, or if it fails to fulfill some other legal obligation.

Court-Ordered Dissolution

Dissolution by order of the court is another form of forced dissolution. Court-ordered dissolution can happen as a result of bankruptcy proceedings, lawsuits by creditors, a legal dispute between members of the LLC, or legal action by a state or federal agency.

Results of Automatic Dissolution

The law of the state where the LLC was formed will usually include provisions for what must be done in the event of dissolution. Generally, there are several things that must be done or considered.

Winding Up

Dissolution is not the end of the business. Once an LLC is dissolved, the process known as "winding up" begins.

  • Paying off the LLC's debts. Any federal, state, or local taxes that are owed must be paid. And any lawsuits or other legal claims against the LLC must be resolved. If necessary, assets are sold to cover the costs.
  • Distributing assets. After all debts are paid, any remaining assets are distributed to members, in proportion to each member's ownership interest. This process often involves selling the assets and distributing the funds received. However, especially with smaller LLCs, items of property may be distributed directly to members.
  • Closing accounts. It's important to close out business bank accounts, lines of credit, and credit card accounts. Any insurance policies, licenses, registrations, or permits in the company name should be canceled.
  • Filing dissolution documents. The state where the LLC was formed, and any other state where it is registered, may require the LLC to file some type of dissolution document with the agency that regulated LLCs. Forms and dissolution requirements can usually be found on the state's website, and forms can often be filed online.
  • Dissolution and the IRS. Federal tax filings when dissolving an LLC include the usual tax forms that would be filed for any year. Some forms include a box to check to indicate that it is the final return for the business. Forms may also need to be filed relating to the sale or exchange of LLC assets, and if the LLC elected to be taxed as a corporation. The IRS website includes a checklist of IRS forms that may need to be filed when closing a business.

Liability

Upon dissolution, new business transactions must be avoided or this limitation of liability for members could be lost. Also, assets or final profits distributed to a member are no longer LLC property, so they can be subject to attachment for personal debts of the member.

Business Name

A dissolved LLC will no longer have protection for its name. Another LLC may register the name. However, it may be possible to go through the process of reserving the name if some or all of the members plan to form a new LLC to continue the business.

Reinstatement

In an administrative dissolution for failure to comply with state legal requirements, the LLC may usually be reinstated by complying with the law within a certain timeframe. This process may involve paying penalties for late compliance.

Continuing Business Operations

Even if there is an automatic dissolution of an LLC, it may be possible to continue business operations as a sole proprietorship or general partnership. Members could also form a new corporation, LLC, or other entity in order to continue operations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.