An LLC, or limited liability company, is a business structure that protects the owners, known as members, from personal liability. In other words, should the company fail to pay its debts, only the assets of the business are subject to collection activities initiated by creditors. However, as the term implies, protection from liability is limited. Certain events can trigger an automatic dissolution of the business entity, possibly placing the personal assets of its owners at risk.
One of the most common factors that can cause the automatic dissolution of an LLC is the failure to comply with filing regulations set forth by the state in which the business entity was formed. There are certain annual reports to submit to maintain good standing status, as well as filing fees. Neglecting these requirements may trigger an automatic dissolution of an LLC by the state. Filing requirements and deadlines vary among states, so check with the Department of State for each state in which your LLC conducts business.
Although a lapse in filing annual reports is a sure-fire way to invite an automatic dissolution of an LLC by its governing state, certain actions by its members may also dissolve the company -- namely death or voluntary withdrawal. Unless there is a transfer of interest or other provision outlined in the operating agreement, the LLC automatically terminates when either event occurs. A change in business structure, like a merger, may also precipitate dissolution of the former business entity in favor of the newly formed one. In addition, terms with expiration dates put into place when the LLC was formed may automatically dissolve the company at a specific point in time.
Effect on Liability
The automatic dissolution of an LLC does not necessarily prevent a company from doing business, although the liability status of its owners may change. Most states will dissolve an LLC that has not complied with filing or renewal requirements after a certain length of time, but the company can usually still operate as a sole proprietorship or general partnership. If it does, however, the personal property of its owners are liable against the debts of the business. In some states, the failure of an LLC to file as a foreign entity is an exception to automatic dissolution and limited liability remains intact for its owners.
Read More: What Is the Difference Between a Limited Liability Company & a Corporation?
In addition to losing the privilege of limited liability during the time the LLC is dissolved, the company may also lose the legal right to its name. Depending on the state, it may be possible to file an application to reserve the business name, providing the name was not registered by another entity while the LLC was in dissolution. In New York, for instance, you can reserve a name for up to 60 days, with two 60-day extensions after that.
- NY Department of State: Limited Liability Company Filings
- Gentry, Locke, Rakes & Moore, LLP: Corporate Limited Liability Lost Upon Dissolution
- ToolKit.com: Piercing the Veil of Limited Liability
- Michigan Department of Licensing and Regulatory Affairs: Entrepreneur’s Guide
- USLegal: Limited Liability Companies Law & Legal Definition
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