Dissolving An LLCJoseph Raymond
November 17, 2008 — 3,298 views
In these troubled economic times, I receive as many queries regarding dissolution of LLCs as initial organization. It comes as something of a shock to some business owners when presented with the steps necessary to legally dissolve their US based LLC. First, the basic steps to LLC dissolution:
- Member vote to dissolve;
- Adoption of plan of dissolution;
- Actual winding up of business;
- Obtaining a tax clearance letter from the state taxing authority and
- Filing certificate of dissolution with Secretary of State's office (for state where your LLC was organized).
Step 1 appears simple enough on its face but what if less than all LLC member agree to dissolve? First, check the LLC operating agreement to see what member voting percentage it requires for dissolution. If your operating agreement is silent on the issue, then the state LLC act controls. Most require unanimous member consent to voluntarily dissolve the LLC with the notable exception of California. See Cali. Corp. Code Section 17350(b) ("vote of a majority in interest of the members"). Linked at the top of this page is an example of LLC operating agreement setting member voting requirements for dissolution, see Section 3.5(f) of agreement. If unanimous consent is require in the operating agreement is there any way to dissolve the LLC with less than unanimous consent? Yes. Most states allow for a court action by dissident members to dissolve an LLC where they have reached a management impasse. It's costly and time consuming to go to court on such an issue, therefore, try to work it out with your fellow members before embarking on such a path.
The plan of dissolution basically sets out the methodology under which business operations of the the LLC shall be ceased, the assets sold, the creditors paid, and what shall happen to any funds remaining. If the LLC is insolent (meaning its assets are less than its liabilities), then the plan should address allocation of the LLC assets among the creditors. One suggestion on this front--pay all government taxing authorities prior to private creditors if at all possible. The plan must be adopted by the LLC members. After adoption of the plan, the next step is the actual winding up of the affairs of the business. Notification of creditors of the LLC that a plan of dissolution has been adopted is required by law. After the business affairs of the LLC have been wound up, the LLC seeks a tax clearance letter from the appropriate state taxing authority. Once acquired the tax clearance letter is filed with the certificate (or notice) of dissolution with the Secretary of State's office. In most instances, you can find a preprinted form Certificate of Dissolution at the Secretary of State's web site. I suggest getting this form at the beginning of the dissolution process and reading the instructions carefully. The instructions should list all the steps to dissolution in your state.
There is a simplified procedure for dissolution of an LLC that has not as yet commenced business operations. See article discussing simplified dissolution of New York LLC.
About the Author
Lawyer, CPA, LLC (taxation), internet entrepreneur and former Department of Justice trial attorney (1989-1995).