Demystifying the Dissolution Process: New York Limited Liability Companies

Demystifying the Dissolution Process: New York Limited Liability Companies

Choosing to exit a business in which you hold an ownership stake can be a difficult decision. Once you have made that decision, however, there is a series of complex steps to take to ensure a clean break. It is important to follow the appropriate processes and procedures to avoid mistakes and prevent future pain.

One source of confusion for many business owners is that the applicable laws and processes are different for limited liability companies (“LLCs”), corporations, and general partnerships and then also vary from state to state. To best navigate these types of complexities, it is important to work with an experienced attorney who ensures that you follow the law, works to minimize significant disruptions throughout the process, and provides you peace of mind that your exit can be achieved with as minimal headache as possible. 

Before beginning the dissolution process for a New York LLC, you need to review both the articles of organization and the operating agreement for your LLC.  It is important to understand whether these documents have provisions concerning the dissolution process because if so, these provisions will likely control the dissolution process.  Additionally, it will be important to note any voting requirements of the members for dissolution. 

For example, many operating agreements will expressly require the consent of all members to dissolve an LLC.  If the operating agreement does not include a dissolution provision, then New York’s Limited Liability Company Law will generally control the process.  In this case, a vote must be held and, in general, a majority of the members must agree to dissolve the LLC.        

Assuming the members agree to dissolve the LLC, the next step is to start winding up the business.  New York LLCs must file articles of dissolution, which effectively cancels the articles of organization, within 90 days following the date of the dissolution and the start of the windup process.

This windup process involves, but is not limited to, notifying creditors, and settling debts; informing local, state, and federal tax agencies; collecting outstanding account receivables and other monies due to the LLC; liquidating assets and arranging the payment of all outstanding taxes; canceling any business licenses and registrations; and notifying employees, suppliers, customers, and other interested parties.  Once the affairs of the LLC are resolved, any remaining assets (if they exist) are typically distributed to the members following the operating agreement or New York law.

While the cancellation of the articles of organization is effective at the time of filing, it is important to note that under New York law, the termination of the entity does not normally impact the liability of the members during the period of winding up the LLC.

In instances when the vote to dissolve is not successful and the members of the LLC cannot work out their differences,  New York’s Limited Liability Company Law allows a member of an LLC to petition the Court for judicial dissolution, provided that the petitioning member can demonstrate that it is “not reasonably practicable to carry on the  business in conformity with the articles of organization or operating  agreement.” This means that the petitioning member must demonstrate, within the context of the articles of incorporation and the operating agreement, that the management of the entity is unable or unwilling to reasonably permit or promote the purpose of the entity to be realized or achieved; or that continuing the entity is financially unfeasible. Importantly, disputes among members alone are not sufficient reason to petition the Court.  The “not reasonably practical” standard requires that the petitioning member adequately demonstrate that rank discord and quarrels among members have risen to the level where it is an insurmountable hindrance to achieving the purpose of the LLC. 

If the petitioning member is successful in demonstrating the “not reasonably practical” standard, the Court will issue an order of dissolution and the windup process will commence.  Notably, a certified copy of the order of dissolution must be filed with the Department of State by the petitioning member within 30 days of its issuance.

The LLC dissolution process is often complex and emotionally charged. Given that each member has a vested financial interest in the outcome, it can also become contentious if the former partners don’t see eye to eye. The best way to avoid disputes is to have a comprehensive operating agreement in place that outlines the dissolution process.  Where you don’t have the benefit of a well-drafted agreement, Scarinci Hollenbeck’s experienced business divorce attorneys can still help you navigate the process as smoothly as possible.

At Scarinci Hollenbeck, our Corporate, Partnerships & LLC Disputes Practice Group brings together years of expertise in advising LLCs, as well as their managers and members. We recognize the significant emotional and financial strain that disputes and business separations can cause; therefore, our attorneys are committed to pursuing outcomes that safeguard our client’s interests while prioritizing efficient, cost-effective resolutions that address both the legal and personal dimensions of these situations. Contact us today for more help. Stay tuned for part II of this article, releasing on March 8th.