The dissolution of an LLC requires early consideration for business, tax, and legal reasons. Dissolution is often essential to a business exit strategy, to a business restructuring, and to make a business more attractive to buyers.
There are many reasons for formally dissolving an LLC. However, it should not ordinarily be to escape liabilities from lawsuits, contracts or potential claims.
Article 7 of the California Revised Uniform Limited Liability Company Act (“CRULLCA”), Sections 17707.01 to 17707.09 sets forth the statutory procedures to be followed for the dissolution and termination of California limited liability companies.
Section 17707.01 sets forth the events upon which dissolution will or can occur, while Section 17707.02 provides a simplified process for dissolving an LLC that has not conducted any business. There is a procedure under Section 17707.03 for an LLC manager or member to petition the court for a judicial decree dissolving an LLC. that provides a mechanism by which the non-petitioning members can avoid judicial dissolution.
The authority and compensation of the person or persons winding up the affairs of an LLC is set forth Section 17707.04 and the order in which the LLC assets may be distributed during winding up of the LLC is set forth in Section 17707.05. Under this Section an LLC must first pay off or adequately provide for all its known debts and liabilities owed to non-members before making distributions to members.
A canceled LLC (one that has filed a certificate of cancellation as the final step in dissolution) under Section 17707.05 continues to exist for certain purposes, such as distributing assets previously omitted in the winding-up process. The
Section also permits a lawsuit against or by an LLC to continue after the LLC is canceled.
Causes of action against dissolved LLCs may still be enforced under Section 17707.07 which provides for a means of recovery against the assets that have been distributed to members upon dissolution. It also sets forth the limitation period in
general for lawsuits against dissolved LLCs, and an exception for quiet title actions.
The filing requirements with the Secretary of State in the process of dissolution begins with the filing of a certificate of dissolution and ends with the filing of a certificate of cancellation. Section 17707.08 permits an LLC to skip the filing of the certificate of dissolution and file only the certificate of cancellation upon completion of winding up if all its members vote for dissolution.
LLC members may revoke a filed certificate of dissolution and continue the business of an LLC in several circumstances. These are set forth in Section 17707.09.
How, why and when an LLC is to be dissolved should be clearly set forth in the operating agreement. Otherwise, expensive litigation may be required to dissolve the LLC. Proper guidance from attorneys and tax advisers in planning and carrying out the process of dissolution is critical, to avoid unintended tax consequences and surprise liabilities years after the LLC is dissolved.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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