its assets becomes a shell LLC; it remains a legal entity that is free to begin a new business enterprise, much in the same manner as a newly formed LLC. Shell LLCs often lie dormant for years before beginning a new busi-
Below, we’ll cover how to conduct member meetings and votes and manager meetings and votes.
Unless the articles or operating agreement require a higher percentage approval or super majority, the sale would require only majority member approval. Unlike merger or dissolution, no articles respecting the sale of business assets need to be filed with the secretary of state.
Dissolution and Liquidation
Dissolution is the decision to stop the active conduct of a business and formally dissolve the LLC’s charter. There are three types of dissolution:
1. A voluntary dissolution is the intentional dissolution of an LLC by its own owners.
2. An administrative dissolution is a dissolution ordered either by the secretary of state, an equivalent department, or any other authorized state official.
3. A judicial dissolution is a dissolution ordered by a court of law. Judicial dissolutions are very rare.
During the dissolution process, all activities of the LLC are geared to an orderly winding up of the LLC’s business and liquidating of its assets.
Like merger and consolidation, voluntary dissolution usually requires approval by the managers (if the LLC is manager-managed) and by the members. Dissolution also requires the filing of articles of dissolution with the secretary of state. In some states the secretary of state will not approve the voluntary dissolution of an LLC that is not in good standing or that has an outstanding tax liability. This is an interesting paradox, because the eventual penalty for delinquency in LLC filings and franchise taxes is administrative dissolution.
The secretary of state enjoys the power to order the administrative dissolution of an LLC. The secretary of state may exercise this power if an LLC becomes seriously delinquent in meeting its statutory requirements, such as periodic filing and tax reporting requirements. What constitutes a delinquency serious enough to warrant an administrative dissolution will differ widely from state to state. Some states allow a reinstatement of good standing following an administrative dissolution, if the LLC properly files and pays all back taxes. In Nevada, this process is called reinstatement ; in Delaware, it’s called revival.
A court of law may order the judicial dissolution of an LLC upon the request of a state attorney general, a member, or a creditor. A member, for example, may bring an action to dissolve an LLC if the LLC is wasting its assets, if the member’s rights are being abused by other members, or if there’s a voting deadlock among members or managers.
You should always endeavor to avoid dissolution. Dissolution can lead to a failure of an LLC’s liability protection. See the State Reference Information on the accompanying CD for periodic reporting requirements and tax requirements in your state of organization. You should exercise great care if voluntarily dissolving an LLC. Do not allow it if the LLC has substantial debt. If you are a member of a dissolved LLC with outstanding liabilities, those liabilities may be attributed to you personally.
Articles of dissolution typically provide:
• The name of the LLC to be dissolved
• The date the dissolution was authorized by the board of managers and members
• The percentage of ownership interest voting for and against the dissolution
• The signature of an authorized manager of the LLC
The dissolution is effective on the date the articles of dissolution are filed with the secretary of state unless a different date is set forth in the articles. There is usually a fee charged for filing articles of dissolution.
Activities During Dissolution
What can an LLC do after it has filed articles of dissolution? The LLC may
• Continue to exist as an LLC to wind up and liquidate its business and affairs.
• Collect its assets.
• Dispose of properties that will not be distributed to its members.
• Discharge or make provision for discharging its liabilities.
• Distribute its remaining properties among its members according to their interests.
What can’t the LLC do after articles of dissolution have been filed? It can’t do anything not reasonably calculated to conclude its business. For example, signing a long-term contract to supply goods to another business or obligating the dissolving LLC to purchase goods over a long term would not be consistent with an intent to dissolve the LLC.
▼ Good to Know
Because of the serious consequences of dissolution, the managers should notify each member of the proposed dissolution plan and the time, place, and date of the members’ meeting to vote on the plan. In some states, even the holders of nonvoting shares may be eligible to vote on a plan to dissolve.
How Does a Dissolving LLC Manage Claims Made Against It?
The procedure for managing claims made against a dissolving LLC will vary widely. There are, however, a few common principles, which are expressed in the Uniform Limited Liability Company Act (ULLCA). The ULLCA divides claims made against a dissolving LLC into two kinds: those that the LLC knows about and those that it does not.
For claims that the LLC knows about (contract, government obligations, etc.), it must notify each creditor in writing of the dissolution and the need for the creditor to submit its claim. The notice should specify a deadline for submitting claims, but in no event can the deadline be sooner than 120 days following the written notice. Creditors that fail to file their claims before the deadline will find their claims are barred.
Unknown claims are commonly in areas of product liability, negligence, and environmental disputes. For example, a product that the LLC manufactures contains a defect that the managers and members do not know about. Sooner or later, the defect will be discovered, resulting in the possibility that claims will be filed against the LLC.
▼ Expert Tip
Managing the claims of a dissolving LLC can involve a significant amount of work and hassle. Avoid it by keeping your LLC alive and forgoing dissolution. If your LLC has debts, you can keep it legally alive as a liability basket. It may cost you some annual fees, but it’s safer than dissolving it and then trying to protect your personal assets from aggressive creditors. As long as your LLC is in good standing and properly maintained, creditors and other claimants will be forced to hopelessly pursue claims against the LLC, but you won’t have to manage a group of angry claimants.
For unknown claims, the dissolving LLC should publish a notice of dissolution in a newspaper that is circulated generally in the county where the LLC is located. The notice should describe the LLC and its business and provide that claims against the LLC must be filed within five years. The notice will specify when and how
