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Five Reasons to Seek Judicial Dissolution of a Limited Liability Company

May 01, 2013

Posted in Limited Liability Company Law, Litigation Strategies

2013_04_02__5058When the members decide to dissolve a limited liability company (LLC) in a court proceeding, it is generally the last resort for the aggrieved investors and business owners.  It is an extreme court remedy which is initiated by a lawsuit from a member.  It is often not a preferred outcome, since the members will rarely get market value for their share.  However, it is sometimes the only choice, and the consequences of not filing such a lawsuit could be even worse.

Any member or the manager of an LLC can file a suit in court seeking a decree of dissolution under the circumstances listed below.  These are the grounds for judicial dissolution provided under the California Corporations code §§17005(c), 17351(a), and they cannot be modified or waived in the Article of Incorporation (Article) or Operating Agreement signed by the members.

1.  “It is not reasonably practicable to carry on the business in conformity with the Article or Operating Agreement.”  Corp C §17351(a)(1).

In other words, the economic reasons for forming the LLC and the purpose of operating it are likely to be unreasonably frustrated.  For example, the LLC might have started out manufacturing a product, but due to the changing economy it became more profitable to engage as a service company in product design.  In this example, the LLC’s dissolution can be ordered through a court proceeding.

2.  “Dissolution is reasonably necessary for the protection of the rights or interest of the complaining members.”  Corp C §17351(a)(2).

The term “reasonably necessary” is broad in scope.  Let’s say that you are being unfairly treated by the member who holds a majority of shares of the LLC, and you feel your rights as a minority member are not being honored.  Then under this circumstance, you may ask the court’s assistance to dissolve the LLC.

3.  “The business of the LLC has been abandoned.”  Corp C §17351(a)(3).

In the event that the LLC has stopped conducting business, this provision can be utilized to obtain a formal court dissolution and winding up of the LLC’s business affairs.

4.  “The management of the LLC is deadlocked or subject to internal dissension.”  Corp C §17351(a)(4).

Internal discord is generally the most common reason for the LLC’s members to seek the court’s intervention for dissolution.  This provision merely states that internal dissension or a deadlock must exist, without the need for showing specific details such as dissension resulting in the inability to carry on business as required under judicial dissolution of a corporation.

5.  “Parties in control have been guilty of, or knowingly permitted, persistent and persuasive fraud, mismanagement, or abuse of authority.”  Corp C §17351(a)(5).

Oftentimes, the dysfunction of the members leads to accusations of serious misconduct, mismanagement, fraud, or abuse of authority by members who own the majority share of the LLCAlthough there are many similarities to the procedures for dissolution of partnerships and corporations, the grounds for judicial dissolution of an LLC are broader in scope with more liberal interpretation.

If you have any question about judicial dissolution of a limited liability company, partnership, or corporation, you need to contact an experienced business litigation attorney. Call us today at (714) 415‑2007 to schedule an appointment, or contact us online via our secure contact request form.