When an limited liability company fails, or when it has outlived its intended purpose, the members can choose to dissolve the company. The dissolution of an LLC often is a more difficult process than its formation. Members of an LLC must follow a strict set of guidelines when dissolving their company. Failure to follow these rules can result in prolonged legal exposure to company debts for the individual members, negating one of an LLC's primary advantages.
Breach of Operating Agreement
An LLC Operating Agreement establishes each member's percentage of ownership in the company, including the percentage of the profits or losses, and each member's rights and responsibilities within the company. Members of an LLC can choose to dissolve the company if one or more of the members has violated the terms of the operating agreement. For instance, this might occur if a member signs a legal agreement on behalf of the LLC, but that member lacked the authority under the operating agreement to enter the company into such contracts. The members can choose to dissolve the LLC rather than comply with an illegal contract.
The LLC works best when members agree on the company's strategic direction. When members have irreconcilable disagreements, they can vote to dissolve the LLC. These disagreements can rise from reasons ranging from personality clashes to changing business environments. For instance, if one member of a technology-based LLC believes that the company should target mobile users, while another contends that they should pursue traditional desktop computing solutions, the tension could lead to the company's dissolution.
State agencies must approve an LLC's charter for the company to conduct business in that state. If the company fails to meet the state's requirements, the state can revoke the company's LLC charter. The charter revocation does not constitute an immediate dissolution of the LLC. In some states, members can apply for reinstatement by following the state's guidelines. However, if the members feel that the rules are too restrictive, they also can vote to dissolve the LLC.
An automatic dissolution of an LLC means that the operating agreement among the members expires. This can occur if one or more members are deceased or choose to leave the company. Also, the operating agreement may require the LLC to be in place only for a limited time. For example, a film production company forms an LLC to manage its business affairs during production. After the film has been completed and distributed, the operating agreement can call for an automatic dissolution of the LLC.