Blog | Entrepreneurship

8 Rules for Dissolving Your LLC

Winding up: the process of dissolving your company

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One of the most overlooked processes for starting a business is thinking about the end. High hopes for riches and success often blinds people to planning ahead. But the subject of dissolution is one that should not be ignored. Planning ahead by understanding some of the basic principles of dissolution is important. Whether you go out of business or enter a relationship with another business where your existing business dissolves, there are procedures that must be prepared for from the start.

Limited liability companies are subject to rules covering dissolution specific to this type of entity. The statutory provisions for LLCs vary from one state to another and, because the LLC remains a somewhat newer phenomenon, not a great deal of guidance can be found in case law supporting the fine points involved. Thus, you’ll need to be very careful about determining what rules apply in the state where you form the LLC.

Here are some frequently specified provisions:

  1. Dissolution requires advance approval by a vote for dissolution passed by at least a majority percentage of membership interests.
  2. There are limitations on a member’s ability to have his capital contribution returned upon termination or withdrawal, and even where allowed under an operating agreement, liability for capital contributions existing at the time when a debt is undertaken may allow for continued rights of a creditor even after membership ceases with respect to that part of capital contribution.
  3. Unless allowable with a specific provision, members usually cannot withdraw capital contributions before the process of dissolution and winding up has been completed.
  4. Corporate members may endure dissolution and winding up of their own entities, in which case such an event in some states may cause an LLC to dissolve as well, unless the remaining members purchase the interest and have an agreement to continue the LLC.
  5. Triggering events for dissolution: a specific date upon which the LLC is to end; sale of the LLC’s assets; judicial decrees; or a vote for dissolution by at least a majority percentage of membership interests. Also, death, dissolution, withdrawal, or any other even that renders a member’s position untenable may require dissolution.
  6. The winding-up process is conducted by the managing member or, if the managing member is in default or has left the LLC, then by the remaining members. The LLC can’t do any other business at that point than address itself to matters directly related to winding up.
  7. The order of payment, included—and sometimes modifiable—in the articles of organization or operating agreement, begins with payment to all creditors of the LLC; next, the costs involved in the liquidation process; then a reserve account if there any other expected deeds; repayment of any loans to the LLC made by its own members; and finally distribution of remaining funds to members.
  8. Deficits are not normally subject to further contributions by members, although, if provided for in the articles of operating agreement, a member whose capital contribution was not received or was insufficient may be reachable to the amount still owing by the other members. Usually this is provided for prior to dissolution, but if properly documented as on going, it may be possible to reach the member after dissolution. Nearly all LLCs give no remedy by members versus other members if insufficient funds are available at the point where member distributions would occur. Only the company’s own assets are at state unless, where applicable, an agreement to the contrary allows members to look to others for reimbursement or even indemnification or contribution of that member’s liabilities.

For more information on starting, and stopping your business get my book, Start Your Own Corporation.

Original publish date: June 26, 2019

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