Why is the dissolution of a limited liability company such a big deal? Or is it?
How and when an LLC should be dissolved warrants important consideration as early as possible in the lifespan of the company for business, tax, and legal reasons. A well-thought-out dissolution can be an essential tool, and sometimes an inevitable step, in mapping out a business exit strategy, cleaning up a business divorce, restructuring, and making a business more attractive to buyers.
And contrary to popular misbelief, while there are many reasons for formally dissolving an LLC, escaping liabilities from lawsuits, contracts or potential claims should not be one of them.
The statutory procedures to be followed for the dissolution and termination of California limited liability companies are set forth in Article 7 of the California Revised Uniform Limited Liability Company Act (“CRULLCA”), Sections 17707.01 to 17707.09.
Section 17707.01 sets forth the events upon which dissolution will or can occur. It was amended in 2016 and effective January 1, 2017.
Section 17707.02 provides for a simplified process for dissolving an LLC that has not conducted any business. It was amended in 2016 and effective January 1, 2017.
Section 17707.03 sets forth the procedure for an LLC manager or member to petition the court for a judicial decree dissolving an LLC. It also provides a mechanism by which the non-petitioning members could avoid such judicial dissolution. This section was amended in 2016 and effective January 1, 2016.
Section 17707.04 provides for the authority and compensation of the person or persons winding up the affairs of an LLC. This section was first added in 2012, effective January 1, 2013, and operative January 1, 2014.
Section 17707.05 sets forth the order in which the LLC assets may be distributed in the process of winding up. Importantly, it requires that an LLC first pay off or adequately provide for all its known debts and liabilities owed to non-members before making distributions to members. This section was added in 2012, effective January 2013, and operative January 1, 2014.
Section 17707.06 permits a canceled LLC (one that has filed a certificate of cancellation as the final step in dissolution) to continue to exist for certain purposes, such as distributing assets previously omitted in the winding up process. It specifically allows a lawsuit against or by an LLC to continue after the LLC is canceled. This section was amended in 2015 and effective January 1, 2016.
Section 17707.07 provides for enforcement of causes of action against dissolved LLCs. It provides for a means of recovery against the assets that have been distributed to members upon dissolution. It also prescribes the limitation period in general for lawsuits against dissolved LLCs, and an exception for quiet title actions. This section was amended in 2019 and effective January 1, 2020.
Section 17707.08 sets forth the filing requirements with the Secretary of State in the process of dissolution, which starts with the filing of a certificate of dissolution and ends with the filing of a certificate of cancellation. An LLC is allowed to skip the filing of the certificate of dissolution and file only the certificate of cancellation upon completion of winding up, if all of its members vote for dissolution. This section was amended in 2015 and effective January 1, 2016.
Section 17707.09 provides a means for LLC members to revoke a filed certificate of dissolution and continue the business of an LLC in a number of circumstances. This section was amended in 2015 and effective in January 1, 2016.
Commonly asked questions about the dissolution of LLCs include:
· How would a dissolved LLC be able to take the actions permitted or required by Corporations Code Section 17707.06, when and if “its powers, rights, and privileges” have ceased upon the filing of certificate of cancellation pursuant to Section 17707.08(C)?
· Will the members of a dissolved LLC be personally liable for the liabilities of the company?
· Will a dissolved LLC continue to be bound by the contracts executed before cancellation? And what about contracts executed after cancellation?
· When does the liability of a dissolved LLC stop accruing? Or does it ever?
Some of these important questions do not always have a quick and easy answer under the current law.
How and when an LLC will be dissolved should be clearly set forth in the operating agreement to avoid time consuming and costly litigation. Further, it is crucial that LLC members and managers obtain proper guidance from their attorneys and tax advisers in planning and carrying out the process of dissolution, so that they avoid being hit with unintended tax consequences and surprise liabilities years after dissolution.
This eBulletin was prepared by Monica Lin at CEO Law, Inc. lin@CEOfirm.com
Partnerships and LLCs Committee
Rostow & Auster LLP
Katie O’Neill Tran
O’Neill Tran Law
CEO Law, Inc.
Law Office of Ronald Newton