When and How is an LLC Dissolved?

People often talk about starting a business, or how to get a business off the ground the right way. But many people aren’t aware of the process to dissolve a corporation—particularly a Limited Liability Company (LLC).

Of course, failure to abide by simple state required filing guidelines can lead to the state dissolving your company. But that’s not the kind of dissolution that causes the most common problems. Usually, it is an involuntary dissolution, sometimes called a judicial dissolution.

When can a Court Dissolve an LLC?

A member of an LLC can ask a court to dissolve the LLC for certain reasons. The reasons are as follows:

1. The company’s activities are unlawful – Although this sounds like mobster or group crime activities, companies that are defrauding people, or operating outside of required government regulations, can be dissolved at the request of a member (although a court may not grant the relief, if the unlawful activities don’t rise to a serious level)
2. It is not reasonable or possible to carry out the LLC in the way the LLC was originally formed – For example, the economy or laws change in such a way that the company can no longer properly operate
3. The managers or members of the LLC are acting illegally – Here, the goal, purpose and mission of the LLC are fine—it’s just the behaviors of certain members who are acting illegally. This is very similar to a shareholder derivative lawsuit in a corporation. Common scenarios may be LLC managers engaging in self-dealing, or skimming money from the company, or simply not acting in a way that is in the best interest of the LLC. Of course, any patently illegal activity, like theft or defrauding consumers, would be a basis for dissolution.
4. The LLC’s assets are being wasted or misappropriated – Again, similar to a shareholder derivative suit. In this scenario, there may not be illegal activity by a managing member. But the business decisions are so poor, and so devoid of good business judgment, that LLC assets are being wasted. However, usually this goes hand in hand with #3 above—for example, a manager that is making the LLC pay a lot of money for goods or services to a separate company that the manager also has an interest in. This would be an example of self-dealing, and wasting the LLC’s money.
5. The LLC’s managers are deadlocked – When managers who have voting power are so at odds, and have such conflicting opinions about the direction of the LLC, the LLC may be powerless to even operate. If there is no consensus among managers, no business can get done. While everyone is arguing over whether the LLC should do A or B, the LLC is losing money by not being able to function.

Call the West Palm Beach business litigation lawyers at Pike & Lustig to help you whether you’re trying to start a business, or end one safely and legally.