Dissolution of a Limited Liability Company

By Lane V. Erickson, Idaho Business Attorney

Whenever I help a person or a group of people get together to start an LLC, I talk with them about ending their business relationship. In other words, one of the first things I discuss with the business owners is their plan for taking care of the business and each other if one or more of the owners decide they want to end the business relationship. To put it another way, I start with the end in mind.

The reason I do this when we are starting an LLC is because this is the time when everybody is happy, energetic, enthusiastic about the business and each other, and in the best frame of mind to think about the problems that could come up later in the business relationship. It is so much easier to come up with a solution to solve a problem when everyone is happy and speaking to each other, than it is when people are angry, bitter, or distrustful which is usually the situation when things go bad.

As Idaho’s premier business law attorneys, our team at the Racine law office works with each client in the creation of an LLC to come up with a plan that will help them when the time comes to dissolve the LLC and end the business relationship. Our team of skilled and experienced attorneys have assisted business clients for more than 70 years in both the creation and dissolution of business operations. Because of our experience we understand the difficulties that arise when the owners don’t trust each other anymore, or when the business just needs to be ended. We have helped numerous business clients through this process, and we are confident that we can help you too.

Our team of experienced and knowledgeable attorneys consists of partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our team of attorneys consistently receives the highest ratings possible from clients, judges we work with, and others. These ratings can be reviewed online at Martindale-Hubbell, Avvo, and Justia.

As I mentioned above, the beginning of a business relationship is always the best time to talk about how the business relationship may end down the road. When a business that operates through an LLC ends, it is commonly called a dissolution. There really are three main ways that an LLC can dissolve. The purpose of this article is to discuss the three basic ways that an LLC can dissolve. This article is only a summary and is not designed to give legal advice concerning these three different ways. Rather, we encourage you to contact us if you have any specific questions about dissolving an LLC.

The first method we will describe, and perhaps the easiest way that an LLC can be dissolved, is through an administrative dissolution. An administrative dissolution is one that is done automatically. This type of dissolution is based on the statutes in Idaho which require every LLC to file an annual report with the Idaho Secretary of State’s office in order to continue to operate.

After registering an LLC with the Idaho Secretary of State’s office, the owners of the LLC will receive a reminder about 3 months before the anniversary date of the filing of the LLC, that an annual report is required to be filed. Filing an annual report is a simple thing to do. The owners of the LLC can simply go online and fill in the information on the annual report form, sign it, date it, and then electronically file it with the Idaho Secretary of State’s office.

If the owners fail to file an annual report for their LLC, then shortly after the anniversary date of the filing of the LLC, the Idaho Secretary of State’s office will administratively dissolve the LLC. There are no formal documents that are sent to the LLC owners. Rather, the registration of current LLC business names that the Idaho Secretary of State maintains, will show that that business has been administratively dissolved and will provide a date of when this occurred.

If an owner mistakenly fails to file the annual report and wants to continue operating after their LLC has been administratively dissolved, the LLC can be reinstated by filing an additional form and paying an additional fee. In this way, when mistakes happen, which they sometimes do, a business owner is able to continue registering their LLC business and operate under that business name.

However, if after the administrative dissolution takes place, no additional steps are taken by the owners of the business, then the LLC is no longer registered and is no longer recognized by the Idaho Secretary of State’s office as a legitimate LLC business. This is important because if an LLC is not recognized by the Idaho Secretary of State, then the LLC cannot exercise any of Idaho’s laws to protect its business. In other words, it cannot file a lawsuit, it cannot seek any licensing or other registrations, and in many instances simply cannot function.

The next most common procedure for dissolving an LLC is a dissolution by agreement. When the LLC was started, the owners of the LLC likely signed a written operating agreement. The operating agreement acted as a contract between the owners of the business to describe who the owners were, the percentage of ownership each owner had in the LLC, as well as who the manager of the LLC would be. Additionally, the operating agreement would describe specific limitations on the ability of an owner to transfer their ownership interest away from themselves to third parties.

Because a written operating agreement acts as a contract, to end the contract the owners of the business usually also have to use another written agreement. This written agreement could be a dissolution agreement.

In summary, a dissolution agreement is nothing more than a written agreement by all the owners of the business on how the LLC will be dissolved. It usually describes the date of the dissolution, the effect of the dissolution on the ownership interests owned by each member, and how the assets of the business will be divided between the owners of the business.

A dissolution by agreement usually only occurs when the owners of the business are still in good favor with one another. In other words, there have been no actions that have created animosity or hard feelings between the owners of the business.

When there are hard feelings or animosity that exists, or when the owners of the LLC simply cannot agree on how to dissolve the business, then usually the dissolution has to be done by the third method which is a judicial dissolution. A judicial dissolution is exactly what it sounds like. A Court gets involved in determining how the business will be dissolved and how the assets of the business will be distributed between the owners.

In a judicial dissolution, the owners of the business have voluntarily given up their ability to dissolve the company on their own. Rather, the owners of the business have turned the job of ending the business and splitting everything up to a third party which is the judge in the dissolution action.

A judicial dissolution can be an ugly experience. Additionally, it’s almost always an expensive experience. For this reason, whenever possible, we recommend that our clients do their best to try to reach a written dissolution agreement with the other owners so that they stay in control of the ending of the business.

This article only provides a short summary of the different ways that dissolutions of a business can occur. This article was not meant to be an exhaustive description of these processes. Rather, if you have questions or concerns about the dissolution of your LLC, we encourage you to contact us so we can answer your questions and assist you through the process. We have helped numerous business owners through dissolutions, and we are confident that we can help you too.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.