Ultimate LLC Compliance Guide. Michael Spadaccini
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obviously endeavor to conduct your dissolution so as not to leave lingering liabilities.
Enforcing Claims Against Dissolved LLCs
Under the ULLCA and in many states, claims of those who respond within the claim period may be enforced against the LLC. Recovery is limited to those assets that the LLC has not already distributed to its members or other creditors. If the assets have been distributed, claims may be enforced against the members, but recovery is limited to the value of assets distributed to the members. In the absence of fraud or other unusual circumstance, no member shall be personally liable for claims amounting to more than the value of assets distributed to him or her. Courts will not permit an LLC or its members to transfer LLC assets if the purpose of the transfer is to defraud claimants. In certain circumstances, entity transfers to one claimant may be attacked by another claimant if the LLC unfairly preferred the first claimant over the second.
Because dissolution involves the potential that a creditor could come knocking on your door to recover the value of assets distributed to you, it is important to follow any statutory claims procedure. Also, because of tax and other aspects of a dissolution, you would be wise to work closely with a good business attorney.
The following form is a sample certificate of dissolution for use in Delaware, which is fairly representative. (In Delaware, they call it cancellation.) You’ll need to check with your specific state, because the forms will differ widely and your state may have additional requirements. All secretary of state offices offer sample certificates of dissolution. These documents are rarely longer than one page.
Sample Certificate of Dissolution
STATE OF DELAWARE CERTIFICATE OF CANCELLATION OF LLC
1. The name of the limited liability company is DEF LLC.
2. The certificate of formation of the limited liability company was filed on _____________________.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Cancellation this __________ day of _____________, 20__.
By: _____________________
Signature of Authorized Officer
Name: _____________________
Print or Type
Title: _____________________
DISSENTERS’ RIGHTS/MEMBERS’ APPRAISAL RIGHTS
Members don’t always agree with each other. One may believe that a merger is the best thing for an LLC and another may feel just the opposite. In addition, not all members are equal. Some own voting shares; others may own nonvoting shares. One member may own more than 50 percent of the outstanding voting interest of an LLC and thus be considered a controlling member, at least for matters requiring majority approval. Members who don’t own a controlling interest in stock are considered minority members. Minority members are obviously subject to getting outvoted on issues.
Statutory Protection for Minority Members
Because members don’t always agree and because minority members can be directly impacted by decisions of the controlling members, most state statutes provide for dissenters’ rights or members’ appraisal rights when the LLC’s majority seeks to undertake a serious event, such as to sell the business. These rights are intended to protect any minority member who does not believe that a proposed fundamental change is in the best interests of the LLC or in his or her best interests. A member exercising his or her dissenters’ or appraisal rights can compel the LLC to purchase his or her shares. The degree of protection that minority members enjoy depends on the state. For example, California is very protective of minority members, whereas Nevada minority members receive comparatively little protection.
Under California law, dissenters’ rights arise whenever:
• A plan of merger is submitted.
• Any exchange of shares between two companies is proposed (if the member has voting rights) .
• The LLC proposes to sell all or most of its assets outside of the ordinary conduct of its business.
• The LLC proposes to take any other action to which the articles or operating agreement attach dissenters’ or appraisal rights.
If an LLC proposes any action to which dissenters’ or appraisal rights apply, the notice to members noting the meeting’s time, date, and place must also indicate that dissenters’ rights are available. Upon receipt of this notice, a member must notify the LLC of his or her election to exercise dissenters’ rights.
If the proposed action is later approved, an LLC must notify all members who indicated their intent to exercise dissenters’ rights. This notice must include a form of demand for payment and a timetable by which the members must submit their demands. In addition, the LLC must include financial information and a statement indicating its estimate of the value of the LLC’s ownership interests and how it arrived at its estimate.
▼ Good to Know
Members who wish to take advantage of dissenters’ rights can’t vote their shares in favor of the proposed LLC action. If they do, the dissenters’ rights are no longer available to them. In addition, both members and the LLC would be wise to come to an agreement concerning the value of shares without resorting to the courts. Legal action in the courts is uncertain and expensive.
The member can accept the LLC’s estimate and submit a demand for payment. If the member does not agree with the estimate, he or she should submit a demand for payment that indicates his or her estimate of value. If the LLC does not agree with the estimate, the parties can petition the local court to determine its value.
LLC RECORDS
There is a common misconception that LLCs can operate with nearly no formalities. Certainly, the formalities required of LLCs are less than those required of corporations. When LLCs first began appearing as an alternative to corporations, many professionals and academics loudly touted the lack of formalities as a key selling point. But as time has passed, there have been some court decisions that are tending to indicate that LLCs will be held to a fairly high standard in order to preserve the their liability shield. We discuss LLC liability protection in detail in Section V: LLC Lawsuits and Personal Liability Protection, with some actual personal liability cases.
Remember: state statutes will only dictate the minimum standard of formalities and recordkeeping that an LLC must follow. One should always endeavor to follow a higher standard of formalities and record-keeping than the statutory minimum. There are several important benefits to following higher standards.
The single greatest reason is for liability protection. The central concept in LLC liability protection is separateness. Formalities and record-keeping support this concept. A lack of formalities and record-keeping can be interpreted by a court to indicate a lack of separateness of individual and entity. The judge in Labadie Coal Co. v. Black said it better than I ever could: “Faithfulness to the formalities is the price paid to the corporation fiction, a relatively small price to pay for limited liability.”
If you ever sell your business, a potential buyer and his or her professional team will examine your records. If those records are in a poor state, it will tend to lower the price you’ll get or delay the sale.
Good records can ward off action by the IRS. The IRS imposes its own standards for recordkeeping; generally those standards are higher than the statutory minimum.
So, you should venture to maintain formalities and keep appropriate records. Key concepts in maintaining LLC liability protection are separateness, as mentioned above, and control