How to Divide an LLC

By Heather Frances J.D.

Even if you’ve only been in business a short time, dividing your limited liability company can be complicated, since there is no one-size-fits-all solution. An LLC is a hybrid type of business entity that mixes features of a corporation and a partnership, which makes it flexible. LLCs are formed under the authority of state law, and each state’s LLC law has its own provisions to govern breaking up an LLC. States even have different terms to describe this event – winding up, termination, cancellation or dissolution.

Controlling Provisions

An LLC’s management structure is modeled after a partnership. The members may decide amongst themselves, through an operating agreement, how to manage their business and what will happen if they want to break up the LLC. If there is no existing agreement, or it does not address dissolution, the default provisions of the LLC’s state laws will apply.

Agreement

Often, the LLC’s members must all agree to break up the LLC. If less than the entire membership wants to break up the company, the operating agreement may give the other members the right to buy out the withdrawing members. Without an agreement, the question of dividing the company may end up in court, with one member trying to force dissolution and the other members fighting to keep the LLC intact. Depending on the state, the court could force a buyout or supervise liquidation of the business.

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Balance Accounts

Before your LLC can legally terminate, it must pay all its debts, including balancing every member’s capital account. Your state may even require you to include a statement about debts in your termination filing. Repay loans from members or collect loans extended to members, and pay off creditors.

Valuation and Transfer

The remaining business assets must be distributed to the LLC's members, which will require you to assess the value of those assets. Once the total value of the assets is known, the members can determine which assets they wish to liquidate and which will remain whole. Then, each member will be assigned cash or assets that equal his percentage interest in the company.

Dissolution

The LLC will need to file the proper dissolution paperwork with the state to formally terminate the LLC. Some states, like Georgia, provide a suggested format for dissolution filing. Others, like California, require specific state-issued forms which you can obtain from the Secretary of State. Final federal and state tax returns must also be filed. Since an LLC may choose to be taxed as a partnership or a corporation, the LLC must file the proper forms for its tax situation. For example, if the LLC is taxed as a partnership, the LLC must distribute final K-1 forms to the members.

New Business

If any member wants to continue operating as a business after dissolution, he will have to form a new LLC or other business structure.

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How to Dismantle an LLC
 

References

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How to Become an LLC Business

The choice of business structure is one of the first and most important business decisions a new owner can make, but the decision is not set in stone. If you are running an existing business as a sole proprietor, partnership or corporation, you may choose to convert the business into a limited liability company. An LLC is a hybrid business structure, providing the limited liability features of a corporation while maintaining the ease and flexible management style of a sole proprietorship or partnership.

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.

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