Many reasons exist for members to want to dissolve a Limited Liability Company (LLC). For example, financial problems, lack of business, and disagreements might mean it is impossible to continue operations. While members can voluntarily dissolve an LLC, the members may deem it necessary to seek a judicial dissolution under certain circumstances.
When Can an LLC Be Dissolved Involuntarily?
An LLC usually starts with optimism and a shared vision for the company. When business does not go as planned in a multi-member LLC, dissolution might be the only option. The operating agreement usually provides members with the procedure for dissolving the company. A court may also dissolve an LLC under Section 702 of New York’s LLC law by application of a member “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization of operating agreement.”
The standard “not reasonably practicable” is not defined by statute. Courts typically require the party seeking dissolution to show that management is unable or unwilling to reasonably promote the stated purpose of the entity to be achieved or show continuing operations is not financially feasible.
A petition to dissolve an LLC is usually brought due to these reasons:
- Frustration of purpose — If the purpose for which the LLC was formed is no longer relevant, it may be impossible to continue business operations.
- Deadlock — When members are deadlocked, one may sue to dissolve the LLC if irreparable harm to the company is being suffered and business can no longer be conducted.
- Misconduct — A member may petition to dissolve the LLC if another member engaged in misconduct, such as mismanagement, fraud, or abuse of authority under the operating agreement.
- Abandonment — If all other members abandon the business or the company stopped conducting the business specified in the operating agreement, one member may file a petition for dissolution.
Voluntary dissolution of an LLC lets the members terminate the business as they see fit. It also provides more freedom than judicial dissolution regarding how outstanding liabilities will be handled. When an LLC is dissolved by a judge, members must adhere to the requirements in the court order.
What Happens After an LLC is Involuntarily Dissolved?
Once the decision has been made to dissolve an LLC — whether voluntarily or involuntarily —the wind-up process must begin. When the court grants a judicial dissolution or Articles of Dissolution have been filed, the LLC cannot enter into new business or contracts. Instead, the company must work toward satisfying any current agreements and follow the court’s order specifying how the LLC must be dissolved.
Any outstanding debts and liabilities must be paid from the LLC’s assets. Remaining assets must be distributed to members for the return on their investment, and then in proportion with their interests in LLC distributions. If no assets remain after creditors have been paid, members receive nothing. Involuntary dissolution does not mean the LLC won’t be held liable for paying taxes.
Contact an Experienced New York Business Law Attorney
Involuntary dissolution of an LLC can be a complex matter. If you are a member of an LLC seeking judicial dissolution, it’s essential to have a skilled business law attorney who can help you navigate the process. Brinen & Associates is committed to providing reliable representation to LLC members for a wide variety of business law matters, including voluntary and involuntary dissolution. Call (212) 330-8151 or send us a message to learn how our New York Business Law attorneys can help.