What Does an Automatic Dissolution of an LLC Mean?

By Karyn Maier

An LLC, or limited liability company, is a business structure that protects the owners, known as members, from personal liability. In other words, should the company fail to pay its debts, only the assets of the business are subject to collection activities initiated by creditors. However, as the term implies, protection from liability is limited. Certain events can trigger an automatic dissolution of the business entity, possibly placing the personal assets of its owners at risk.

Legal Status

One of the most common factors that can cause the automatic dissolution of an LLC is the failure to comply with filing regulations set forth by the state in which the business entity was formed. There are certain annual reports to submit to maintain good standing status, as well as filing fees. Neglecting these requirements may trigger an automatic dissolution of an LLC by the state. Filing requirements and deadlines vary among states, so check with the Department of State for each state in which your LLC conducts business.

Other Factors

Although a lapse in filing annual reports is a sure-fire way to invite an automatic dissolution of an LLC by its governing state, certain actions by its members may also dissolve the company -- namely death or voluntary withdrawal. Unless there is a transfer of interest or other provision outlined in the operating agreement, the LLC automatically terminates when either event occurs. A change in business structure, like a merger, may also precipitate dissolution of the former business entity in favor of the newly formed one. In addition, terms with expiration dates put into place when the LLC was formed may automatically dissolve the company at a specific point in time.

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Effect on Liability

The automatic dissolution of an LLC does not necessarily prevent a company from doing business, although the liability status of its owners may change. Most states will dissolve an LLC that has not complied with filing or renewal requirements after a certain length of time, but the company can usually still operate as a sole proprietorship or general partnership. If it does, however, the personal property of its owners are liable against the debts of the business. In some states, the failure of an LLC to file as a foreign entity is an exception to automatic dissolution and limited liability remains intact for its owners.

Other Consequences

In addition to losing the privilege of limited liability during the time the LLC is dissolved, the company may also lose the legal right to its name. Depending on the state, it may be possible to file an application to reserve the business name, providing the name was not registered by another entity while the LLC was in dissolution. In New York, for instance, you can reserve a name for up to 60 days, with two 60-day extensions after that.

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What Happens When a LLC Dissolves?

An LLC, or limited liability company, operates according to the statutory rules of the state where it is registered. Although each state has its own individual laws relating to the setting up and operation of LLCs, most apply similar rules when an LLC dissolves. In addition to the legal rules, the members of an LLC often enter into an operating agreement when they set up the company; this agreement usually contains specific provisions for dissolving the LLC.

Can I Use a Bank Account After Dissolving an LLC?

Using your limited liability company's bank account after dissolution is essential to wind up the affairs of the LLC, but you cannot use it to enter into new business. An LLC is an independent business entity formed under state law, which also controls how an LLC comes into existence and how it goes out of business. By following the correct steps for dissolution, you will ensure that you have satisfied all the debts and obligations of the company.

Can a Creditor Collect if an LLC Is Dissolved?

Circumstances might arise under which a creditor can collect debt from a dissolved limited liability company. As such, it is essential for business owners to follow the steps necessary to properly dissolve the company and be aware of situations where creditors may collect distributions that have already been allocated to LLC members.

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