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.

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.

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.

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.

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