Limited Liability Company (LLC)

Duration and Dissolution of Limited Liability Companies

Effects of Member Addition, Withdrawal, and Transfer

Generally, LLCs continue their operations even after a member withdraws from the LLC.

During the life of a limited liability company, members may join, withdraw, or transfer their rights of membership to other members. Because LLCs are based on individual state statutes, each state has its own legal requirements for these situations. Likewise, the operating agreement or individual members' agreement will have rules governing these events. Since there could be two competing sets of regulations between the state rules and the operating agreement, the most restrictive rule is followed.

For example, Max Moneybags, a banker, wants to become a member of AllHealth LLC. The state does not have any rules that would limit his membership, but the operating agreement specifies that only health care professionals can become members. This is the more restrictive rule, so it is the one that the LLC must follow.

The members could amend the operating agreement so that Max was included. This amendment would require the written consent of the other members. If AllHealth were a single-member LLC, then only the single member would need to agree. If AllHealth has elected the pass-through taxation option with the IRS, then AllHealth should report any changes in membership to that agency.

States usually regulate withdrawal from an LLC because the withdrawal of a member could substantially change the nature of the business. For example, Dr. Mary is the only individual member of AllHealth who is a doctor. If she withdrew from the company, then its direction could shift to focus on profit, which would be outside of the originally listed vision. Some states allow withdrawal based on the operating agreement. Other states, such as New York, allow withdrawal only at dissolution. If the state allows for withdrawal and the operating agreement has a clause for such an event, then the LLC will continue operations.

Members may also transfer their membership rights. Again, the operating agreement will most likely describe the specifics of transferring membership rights and any prohibitions thereon. A member may transfer their entire ownership percentage or some portion of it. Financial losses flow to the members, and some members may not be in a position to take on those losses. In that case, a member may need to split their ownership amount with another member to offset the risk of loss. By lowering the amount that members own, they lower the amount of loss that would be allocated to them.

The partners in HealthCare Associates are about to retire and are concerned that they will no longer be in a position to take on losses from AllHealth. So, with written approval, they split their 25 percent ownership with DoctorClub, another health provider operating in the same market. In this case, HealthCare and DoctorClub would each have 12.5 percent profit or loss and would each have half a vote.

Dissolving a Limited Liability Company

Usually, the dissolution process for an LLC begins when members vote to dissolve the LLC.

In many states, the death of a member will force the dissolution of the limited liability company. In other words, the LLC will either need to shut down entirely or close and reopen with new articles of organization.

An LLC may dissolve voluntarily. Since LLCs are common for specific projects, such as the production of a movie, the members may decide to dissolve the organization after the project ends. As with the formation of the LLC, the members of the LLC must notify the state when the LLC dissolves. They do this by filing articles of dissolution with the secretary of state. The articles of dissolution is a set of documents that formalizes the end of a corporation's existence.

One of the main reasons to create articles of dissolution is to notify the LLC's creditors that the company is closing. Shutting down a company does not remove the contractual burden on the company. If the company cannot pay its debt, then the debt flows to the members, becoming their debt. But the members of an LLC have limited liability, so creditors may not try to take the members' personal property. Someone who has limited liability cannot lose more money in a business venture than they invested in that venture.

Other liabilities of an LLC may include taxes, employee wages, and licensure requirements. Tax liabilities tend to follow both the company and its members, so the LLC or its members need to pay these before registering the dissolution. Limited liability does not protect them for these types of payments.

As a last step, any assets, profits, and losses will be distributed to the members in accordance with the operating agreement. Some LLCs use an escrow account for their dissolution. An escrow account is an asset that a third party holds during the period in which two other parties are finishing a transaction. The LLC places final monies in the account and holds them until it is able to verify that all outstanding debts have been paid. By doing this, the LLC makes certain that there are no surprises for the members in the future for erroneous handling of final debts. It also ensures that the creditors are paid from the assets of the company.