Perpetual Liability: Everything You Need to Know
The term perpetual liability is a way to define the liability of a corporation that exists as an entity.3 min read
The term perpetual liability is a way to define the liability of a corporation that exists as an entity the same as a natural person with the benefits of limited liability and a perpetual existence. Therefore, for legal purposes, a corporation is the same as a person in terms of the law.
What is Perpetual Existence?
Perpetual existence is a relative term which, in short, means that a corporation may be acquired by another business or entity, go out of business, or cease its existence at some point. A corporation, in essence, is its own entity independent of what may happen to the individuals that are a part of it.
The term perpetual specifically means that something exists for an unlimited or eternal duration. Typically a corporation is marked by a perpetual existence with an LLC existing for a limited duration. An LLC's typical lifespan runs around a maximum of 20 years though in some states there are ways to be able to make LLCs perpetual by simply not filing a specific dissolution date.
When a corporation is formed, the incorporators have the right to create a dissolution date when they feel their mission will be complete and the entity can be dissolved. If not specified, then the corporation will be considered perpetual. If this is the case, then the decision to end a corporation will be up to the shareholders who are also the owners.
Reasons Companies Have a Perpetual Existence
For a corporation to survive, it will typically rely on investors to be able to fund corporate endeavors. By having a corporate existence, the investors will be able to protect their investment in the event that shareholders, officers, or directors decide to depart the company. This makes corporations a more stable investment for investors. There are other benefits to a corporation's perpetual existence including:
- The ability to create a long-term plan to ensure profit growth
- The ability for shareholders to be able to rely on long-term gains as the company grows
- The chance to innovate products, build expertise, and become industry leaders
- It eliminates the necessity to constantly file updated documents to restart the organization
What are Indefinite LLCs?
An LLC that is created to exist until a specific date or events have occurred is said to have an indefinite lifespan. A dissolution date is outlined in the articles of organization, and at that time, the LLC can make the decision to extend the life, incorporate, or dissolve. The dissolution on the articles of organization can set a specific date or a triggering event.
If you wish your LLC to have a perpetual existence, you simply do not specify a dissolution date on your articles of organization if the state allows this. In the event you do not have a dissolution date or an event on your articles of organization, any triggering events should be listed on the operating agreement which will guide the running of the business. The operating agreement should specify what will occur in the event that a member resigns, passes away, or declares personal bankruptcy. In many states, dissolution is required in these events.
When a duration or event trigger is set, the LLC will have a legal obligation to continue the company until the event is complete. This can include things such as a specific date or perhaps the sale of a piece of real estate. If the company is not an at-will LLC, then the LLC will continue to operate even if a member leaves until the term or event has been completed. LLCs that continue to operate after the termination date will be converted into a perpetual LLC.
While coming up with the duration of an LLC may seem like a minor consideration, it is an important decision that should be well thought through. If you decide to set a shorter duration for your LLC, it will come with additional formalities such as the filing of an annual statement every year with the Secretary of State's office. When an LLC accepts a perpetual status, it becomes known as an at-will LLC unless otherwise noted in the company's operating agreement.
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