Why Dissolve a Limited Liability Company

By Jeff Franco J.D./M.A./M.B.A.

A limited liability company’s dissolution is the process of permanently winding up the affairs of the LLC. Once dissolution occurs, the LLC is no longer a legal business entity. However, members are free to create a new LLC and operate a business that is identical to the dissolved LLC. Each state has numerous circumstances and events that may warrant LLC dissolution.

Members

The members of the LLC can make the decision to dissolve the LLC and cease all operations of the business if there is unanimous consent to do so. A vote to dissolve the business can be for any reason, regardless of profitability. The LLC automatically ceases to exist if during any consecutive 90-day period the LLC has no members. Most state statutes allow for dissolution if a member dies, enters personal bankruptcy proceedings or otherwise becomes incompetent. However, remaining members have the authority to continue the LLC and its operations if all members agree unanimously.

Operating Agreement

The operating agreement of the LLC is binding on all members. If the agreement provides that dissolution will occur by the happening of a particular event, the occurrence of that event is grounds for dissolution and requires a winding up of LLC affairs. However, an LLC operating agreement is subject to amendments if a sufficient number of members vote in favor of amending it. Therefore, dissolution is not mandatory on the occurrence of the event if immediately after members amend the clause requiring dissolution. The operating agreement will also provide the number of member votes that are necessary to amend the agreement. This clause of the agreement remains binding on the members even if facing an imminent dissolution. For example, if a unanimous vote is required for amending the agreement, a single member can enforce the dissolution by voting against the amendment.

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Unlawful Business Activity

Any member of the LLC may appeal to a court to order the dissolution of the LLC on the basis that all or a substantial amount of the activities the business engages in are illegal. In addition to the submission of evidence proving the illegal activity, the member must provide reasonable explanations why it is necessary to dissolve the LLC rather than continuing to carry out only lawful activities pursuant to the LLC’s operating agreement.

Illegal Management

A member of the LLC can also request a state court intervene and order a dissolution if the managers or members in charge of managing the operations are using the LLC to engage in unlawful activity or to promote fraudulent business dealings. Court intervention is available even if the management has yet to commit an illegal or fraudulent act, but there is sufficient evidence that fraudulent or illegal activities are imminent. In the absence of fraud and illegality, a member may also request dissolution from a state court judge if the members and managers who have authority to manage the LLC’s operations are acting in a manner that is oppressive and potentially harmful to the member’s interests.

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How Long Can an LLC Operate?

References

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