One of the notable benefits for creating a limited liability company for your business is its inherent indefinite life. Most jurisdictions only force the closure of the LLC in very limited circumstances. When an LLC dissolves and ceases business operations, it is generally the result of members deciding that it is not practicable to maintain business operations in the current form.
The business becomes a legal LLC when your jurisdiction’s office responsible for the creation of business entities files a certificate of organization. The certificate is the first document that initiates the formation process. The document must include the LLC’s business name, an address for its principal office and the designation of an agent who the LLC members authorize to accept legal service of process on behalf of the business. Generally, the secretary of state or its equivalent will review the document to ensure completeness and then officially file it. Once the certificate is filed, the LLC exists for an indefinite period, even in the absence of actual business activities.
When a member dissociates from an LLC, the member’s right to participate in the LLC’s management terminates immediately. Additionally, the member’s fiduciary duties also terminate and the member is free to pursue personal interests even if in direct competition with the LLC. However, a former member is still personally liable for any debts or obligations that accrue prior to dissociation and remain outstanding after dissociation. The dissociation of a member has no bearing on the existence of the LLC unless he is the last remaining member and there is no replacement for a consecutive 90-day period.
Read More: LLC Member Rights
Dissolution of the LLC refers to the legal expiration of the LLC’s existence. A jurisdiction may require the dissolution of an LLC if a member provides a court with proof that the majority of business activities the LLC engages in are illegal, that other members who manage the LLC are using the business to perpetuate fraud or criminal activity or on a showing that other members are acting in a manner that is damaging to another member’s interest. Most state courts also require the applicant to provide a valid reason why dissolution of the LLC is the only practical solution. More commonly, the LLC will terminate upon the occurrence of an event that the operating agreement makes dissolution contingent on. For example, the agreement may state that the LLC must dissolve at any time there are less than three members.
Immediately after the members or the state forces dissolution, all business affairs of the LLC must undergo a winding up process. This first requires the payment of all outstanding debts followed by the payment of any unpaid distributions that current and former members have a legal right to receive. If assets remain, each member receives a return of capital for all prior contributions they made. The current members of the LLC receive remaining assets and funds as a profit distribution in accordance with an allocation method the operating agreement requires.
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, Ph.D.; 2010