Key Takeaways

  • An LLC dissolution agreement formalizes how a limited liability company will be terminated, including asset distribution and liability settlements.
  • Common dissolution triggers include unanimous member vote, expiration date, death, or bankruptcy of a member.
  • The operating agreement should contain a dissolution clause outlining termination procedures and distribution priorities.
  • State-specific rules may require tax clearance or public notification before dissolution is complete.
  • A formal dissolution agreement can help avoid future legal disputes among members.

The LLC termination agreement establishes the terms and procedure for dissolving a limited liability company. It can be structured as a separate agreement or included as a clause in the LLC's operating agreement.

The Purpose of an LLC Operating Agreement

An LLC is a popular small business structure that combines elements of a partnership and corporation, including limited liability protection for its members and an informal management structure.

Your LLC operating agreement establishes all the policies and procedures for your company. This provides guidance for members as well as consequences for failure to follow the provisions of the agreement.

When the LLC is terminated, the operating agreement is automatically void.

Key Components of a Dissolution Clause

A well-drafted LLC operating agreement typically includes a dissolution clause, which outlines the specific events and procedures that will trigger the termination of the LLC. This clause plays a vital role in preventing disputes by providing clear guidance to members.

Common elements in a dissolution clause include:

  • Triggering Events: Voluntary vote of members, expiration of the LLC’s term, or events like bankruptcy or death of a member.
  • Member Consent Requirements: Whether unanimous consent is needed or if a specific voting threshold (e.g., two-thirds majority) is sufficient.
  • Winding-Up Procedures: Designation of a responsible party for asset liquidation, debt settlement, and tax filings.
  • Distribution of Assets: The order in which debts, obligations, and remaining assets are handled—often prioritizing creditors, followed by member capital contributions and profits.
  • Notification Requirements: Whether members or state agencies must be formally notified of the LLC's intent to dissolve.

Including this clause in your operating agreement can reduce delays and legal complications during the dissolution process.

Terminating Your LLC

Some LLCs have an agreement in place that specifies a termination date and/or the process for doing so. If this is not the case for your business, you can voluntarily dissolve your LLC in accordance with the laws in your state.

Not all states allow an LLC to exist indefinitely, so confirm whether you need to establish a termination date when you file articles of incorporation.

Some states require the company to be terminated if one of the members dies, goes bankrupt, or is no longer able to act as a member, unless all other members agree to continue the business. In some states, you must notify members and creditors whenever a dissolution event of this kind occurs.

In Nevada, you cannot file articles of dissolution until all remaining business liabilities are satisfied. In other states, like Michigan, you must apply for and receive a tax clearance certificate within 60 days after filing for termination of the business.

Many states require the unanimous consent of members to continue the business after a dissolution event. In some cases, certain members may force dissolution by refusing to consent. For this reason, many LLCs opt to establish a lesser consent requirement if state law allows. A specific majority is usually required by state law.

Some LLCs decide to require unanimous member consent so that each member has the right to decide whether or not to continue with the business after a dramatic event like the death of a member. Your LLC members can make this decision together during the formation process.

If you do not follow your state's dissolution procedures, the LLC will continue to exist indefinitely. Filing procedures may vary depending on whether the decision to dissolve the business is unanimous among members.

State-Specific Legal Requirements for LLC Dissolution

When terminating an LLC, it’s critical to follow your state’s legal procedures, which can vary significantly. In general, the process involves:

  1. Filing Articles of Dissolution with the Secretary of State or relevant authority.
  2. Paying All Outstanding State Fees and Taxes, which may require obtaining a tax clearance certificate in states like Michigan and Illinois.
  3. Settling Claims with known creditors and publishing notice of dissolution (in states where this is mandated).
  4. Canceling Licenses and Permits such as business licenses, sales tax IDs, and local operating permits.

Failure to complete any of these steps properly can result in continued liability, administrative penalties, or denial of future business registrations.

Wrapping Up Business Affairs

The LLC operating agreement should establish the process of concluding the business's affairs upon termination. This should include a procedure for notifying all LLC members and creditors of the termination. Some states require you to mail notice and use specific language, while others require you to post notification of termination in specific newspapers in your area. If you comply with the notice requirements in your state, you are typically absolved of any outstanding business liability after a specific time period.

Other elements of this process include:

  • Completing outstanding contracts
  • Paying outstanding debts
  • Collecting receivables
  • Selling assets
  • Distributing surplus funds among members

The operating agreement should note the responsible manager or member who will complete each of these steps.

Members and managers should be prevented from legally binding the LLC during the dissolution process by the operating agreement. The company will still be responsible for the cost of any purchased goods or services unless the creditor knows that the person who ordered the items in question does not have binding authority. The operating agreement can require the member or manager from reimbursing the LLC for damages that occur in this situation.

The operating agreement should also specify the order in which members will receive distributions from surplus assets. In most states, you must first liquidate your assets to settle creditor accounts. Members who have served as creditors usually hold priority over external creditors.

Drafting an LLC Dissolution Agreement

An LLC dissolution agreement is a formal document signed by all members to confirm the termination of the LLC and allocate responsibilities. It supplements the operating agreement and provides added legal clarity, particularly when:

  • Members disagree on how to distribute assets or wind up the company.
  • The LLC’s operating agreement is silent or vague on dissolution procedures.
  • External parties (such as investors or joint venture partners) are involved.

Key provisions in a dissolution agreement typically include:

  • Statement of Intent to dissolve the LLC.
  • Identification of Parties (members and managers).
  • Timeline for Dissolution and Winding-Up Activities.
  • Distribution Plan for assets and liabilities.
  • Designation of a Winding-Up Manager or Member.
  • Release of Claims among members and affiliates.
  • Confidentiality and Non-Disparagement Clauses.
  • Governing Law and Venue for Disputes.

This document helps ensure that all members agree to the terms of termination, minimizing the risk of future lawsuits or misunderstandings.

LLC Ownership Transfers

LLC ownership transfers are more complex than transfers for a corporation, especially when the LLC has an established termination date. If ownership transfers are allowed based on the terms of your LLC operating agreement, you must let potential investors know about the company's termination date.

Alternatives to Full Dissolution

Before executing a full dissolution, LLC members may explore alternative resolutions that preserve the company’s structure. These include:

  • Member Buyouts: A member exits the company by selling their interest to remaining members or new investors.
  • Conversion to Another Entity: Some states allow an LLC to convert into a corporation or partnership instead of dissolving entirely.
  • Reinstatement: In certain jurisdictions, an administratively dissolved LLC can file for reinstatement if it cures the default (e.g., missed filings or fees).
  • Assignment of Interests: Rather than dissolving, an LLC can assign ownership interest through an internal agreement if allowed by the operating agreement.

These options should be evaluated based on long-term business goals, tax consequences, and state law.

Frequently Asked Questions

  1. What is an LLC dissolution agreement?
    It is a formal contract among LLC members that outlines how the company will be terminated, including asset division and liability resolution.
  2. Do I need a dissolution agreement if I already have an operating agreement?
    While an operating agreement may include dissolution provisions, a separate dissolution agreement ensures all members formally consent to the termination and can clarify specific obligations.
  3. What happens if members disagree on dissolution?
    If the operating agreement requires unanimous consent and a member disagrees, dissolution may not proceed unless allowed by state law or judicial intervention.
  4. Can I dissolve my LLC without notifying the state?
    No. Most states require formal filing of articles of dissolution or similar documentation. Failure to do so may result in ongoing tax or reporting obligations.
  5. Is there a specific order for paying debts during dissolution?
    Yes. Generally, LLCs must first pay off external creditors, then reimburse member loans, and finally distribute remaining assets among members.

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