Even if you’ve only been in business a short time, dividing your limited liability company can be complicated, since there is no one-size-fits-all solution. An LLC is a hybrid type of business entity that mixes features of a corporation and a partnership, which makes it flexible. LLCs are formed under the authority of state law, and each state’s LLC law has its own provisions to govern breaking up an LLC. States even have different terms to describe this event – winding up, termination, cancellation or dissolution.
An LLC’s management structure is modeled after a partnership. The members may decide amongst themselves, through an operating agreement, how to manage their business and what will happen if they want to break up the LLC. If there is no existing agreement, or it does not address dissolution, the default provisions of the LLC’s state laws will apply.
Often, the LLC’s members must all agree to break up the LLC. If less than the entire membership wants to break up the company, the operating agreement may give the other members the right to buy out the withdrawing members. Without an agreement, the question of dividing the company may end up in court, with one member trying to force dissolution and the other members fighting to keep the LLC intact. Depending on the state, the court could force a buyout or supervise liquidation of the business.
Before your LLC can legally terminate, it must pay all its debts, including balancing every member’s capital account. Your state may even require you to include a statement about debts in your termination filing. Repay loans from members or collect loans extended to members, and pay off creditors.
Valuation and Transfer
The remaining business assets must be distributed to the LLC's members, which will require you to assess the value of those assets. Once the total value of the assets is known, the members can determine which assets they wish to liquidate and which will remain whole. Then, each member will be assigned cash or assets that equal his percentage interest in the company.
The LLC will need to file the proper dissolution paperwork with the state to formally terminate the LLC. Some states, like Georgia, provide a suggested format for dissolution filing. Others, like California, require specific state-issued forms which you can obtain from the Secretary of State.
Final federal and state tax returns must also be filed. Since an LLC may choose to be taxed as a partnership or a corporation, the LLC must file the proper forms for its tax situation. For example, if the LLC is taxed as a partnership, the LLC must distribute final K-1 forms to the members.
If any member wants to continue operating as a business after dissolution, he will have to form a new LLC or other business structure.
Read More: Is a Business License Needed to Form an LLC?
- Georgia Secretary of State: Corporations Division: How to Terminate a LLC
- California Secretary of State: Limited Liability Company Cancellation Filing Requirements
- Small Business Administration: Operating Agreements: The Basics
- Citizen Media Law Project: Limited Liability Company
- Internal Revenue Service: Limited Liability Company
- University of Pennsylvania: Uniform Limited Liability Company Act
Heather Frances has been writing professionally since 2005. Her work has been published in law reviews, local newspapers and online. Frances holds a Bachelor of Arts in social studies education from the University of Wyoming and a Juris Doctor from Baylor University Law School.