Automatic Dissolution: Everything You Need to Know
Automatic dissolution occurs through state legal certain action after events like death of a member or a change in business structure, occur within the LLC.3 min read
Automatic dissolution of an LLC occurs through state legal action after certain events occur within the LLC. This could be the death or resignation of a member, a change in business structure, or failure to comply with applicable laws, such as paying taxes or licensing fees. In some states, dissolution occurs annually for those LLCs that are not compliant with state regulations. Automatic dissolution could also be triggered by the LLC's operating agreement or articles of incorporation specifying a date or event.
The actual terms of dissolution vary state to state, but once the LLC is subjected to automatic dissolution, the business entity is considered to be fully dissolved. Whether dissolution is voluntary (as it commonly is) or involuntary (as in automatic), it signifies the end of the business. Dissolution means that the LLC must stop conducting business, satisfy outstanding obligations, and split up its assets among members. In addition, individual state LLC laws include instructions for all components of the LLC dissolution, such as filing required documents like a certificate or articles of dissolution.
What Can Trigger Automatic Dissolution?
There are numerous causes of automatic dissolution, including:
- The death or resignation of a member may result in automatic dissolution. This occurs when there is no transfer of interest or other provision contained within the operating agreement relating to such a circumstance.
- Changes in the structure of the LLC, such as a merger, may also trigger the automatic dissolution of the LLC in favor of the newly formed company.
- If the LLC's operating agreement or articles of incorporation include a specific date or event that shall trigger dissolution, some states require the fulfillment of this dissolution.
- If the state concludes the LLC cannot legally operate due to state regulations (for example, if the LLC has not paid taxes or filed appropriate forms), judicial or administrative dissolution may occur. However, this type of dissolution is not necessarily final. If LLC members decide not to continue business operations, the LLC must voluntarily and legally dissolve.
What Happens After Automatic Dissolution?
Under state laws, the limited liability company (LLC) is a legal business structure that can offer favorable aspects of both corporation and partnership structures. The structure protects the members (owners) from personal liability. This means that if the LLC were to fail to pay its debts, the assets of the members cannot be subject to collection activities by creditors. Only the assets of the business would be applicable. However, protection from liability is limited.
After an LLC has been automatically dissolved, the company may still be able to conduct business, but the liability status of its members may change. Most states that dissolve an LLC that has not complied with filing or renewal requirements will still allow the company to conduct business as a general partnership or sole proprietorship.
However, this means that personal property of its members is liable against the debts of the company. In an exception to automatic dissolution, some states will keep the limited liability of its members in place if the LLC has failed to file as a foreign entity.
Not only will a company lose the advantage of limited liability once the LLC dissolved, but it may also lose the legal right to its name. Dissolution laws vary by state, and some states may allow the filing of an application to hold the business name, as long as another entity did not register the name during the dissolution period. For example, New York State allows the reservation of a company name for up to 60 days, with two additional 60-day extensions following the initial one.
In some states, automatic dissolution is not permanent. For example, Michigan's Corporate Act, P.A. 284 of 1972 allows a domestic corporation to renew its corporate existence even if it was automatically dissolved, as long as the company files the applicable reports and pays all of the required fees for the years they did not file. After the reports have been filed and the fees and penalties are resolved, the LLC's existence is renewed as though no dissolution ever happened.
How to Prevent Automatic Dissolution
When an LLC forms, members can create a buy-out agreement to prevent automatic dissolution. Alternatively, once an LLC has been subjected to administrative dissolution, some states allow the remaining company members to vote whether to continue operations, request a revocation of automatic dissolution, or apply for company reinstatement.
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