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Breaking Up an LLC Will Be Easier to Do in 2017

May 08, 2017

Posted in Business Litigation, Corporate Law, Partnership Law

All good things come to an end and that could include a limited liability company or LLC. California law will change in 2017 and make it easier to dissolve and to wind up its affairs. If you’re involved in an LLC and thinking it’s run its course and time to pull the plug, depending on the circumstances, you may want to wait another couple months.

An LLC is a hybrid business entity. It’s a combination of a partnership and corporation.

  • Its main advantage over a partnership is like the shareholders of a corporation the LLC’s owners’ (members’) liability for its debts and obligations is limited to their financial investment.
  • However LLC members can participate in its management and profits or losses flow through to its members like a partnership.
  • An LLC can’t be formed for businesses that provide professional services that require a state professional license, such as a legal or a medical practice.
  • Forming an LLC is easier to form and maintain than a corporation. LLC’s don’t issue stock, are not required to hold annual meetings or keep written minutes, which a corporation must to preserve the liability protection for its owners.
  • Articles of organization must be filed with the state and LLC members must enter into an operating agreement. An oral one will suffice but a formal, written agreement is a better idea for all those involved.
  • An LLC is normally managed by its members, but they can agree to hire a manager to handle its affairs.
  • For state income tax purposes an LLC will be classified as a partnership if there is more than one owner but members can elect to have it taxed as a corporation.

Earlier this year the California legislature made minor language changes to the Revised Uniform Limited  Liability Company Act (RULLCA) and they will go into effect in January. RULLCA currently states that an LLC could be dissolved and its activities wound up if, among other things, a majority of its members voted to dissolve it.

Starting in 2017 dissolution will require the vote of 50% or more of the voting interests of the LLC members. A similar change was made in the requirements for completing the certificate of cancellation for a domestic LLC that hasn’t conducted any business. The change is intended to help small, two member LLC’s avoid the unnecessary and costly litigation that is currently required in order to dissolve such a business if the two disagree on whether the business should continue. Under the new language as long as one of those two members wants to dissolve the entity that would be enough.

If litigation were to take place any member or manager could start a legal proceeding to dissolve the entity, but must prove one of five circumstances to show the LLC should be dissolved, including that it’s not reasonably practicable to carry on with the business and meet the requirements of the articles of organization and fraud. LLC’s are often are managed by operating agreements which may prevent a majority member from taking action to dissolve the business.

If you’re a member of an LLC and are considering whether it should continue to operate contact our office so we can talk about what’s happening with the business, why you think dissolution could be an option, applicable laws and how we can help protect your legal rights and interests.