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2 min read

Understanding the Dissolution Clause in an LLC Operating Agreement

Let's talk about a crucial aspect of your LLC Operating Agreement you might not have thought much about - the Dissolution Clause. While it's the part of the agreement nobody hopes to use, its importance cannot be overstated.

 

 

person filing a document

What is a Dissolution Clause?

Imagine a Dissolution Clause as an LLC's prepared exit strategy. It governs the process if circumstances arise where your business needs to be dissolved. It will guide you through tricky areas like dividing assets, canceling contracts, or handling debts.

Here's a hypothetical example of a dissolution clause:

 

Example

"In the event that the Members holding 70% of the LLC’s membership vote in favor of dissolution, the Company shall be dissolved in accordance with [Your State] Law. After settling all debts and obligations, any remaining assets will be distributed among members as per their ownership percentage."

 

Types of Dissolution Clauses

Let's dive into the different types of Dissolution Clauses.

  1. Voluntary Dissolution Clause: This type covers scenarios where members collectively choose to dissolve the company. Here's an example similar to the one above:

    Example

    "In the event that the Members holding 70% of the LLC's membership vote in favor of dissolution, the Company shall be dissolved correctly. After settling all debts and obligations, any remaining assets will be distributed as per their ownership percentage."

  2. Involuntary Dissolution Clause: This type is triggered by uncontrollable external factors, such as bankruptcy or even the death of a member:

    Example

    "In the event of the death, retirement, expulsion, bankruptcy, or insolvency of any Member, the LLC will dissolve as per [Your State] Law. The remaining Members may continue to conduct the businesses of the Company, after settling all debts and paying distributions to the departing member or their legal representative as per the agreed ownership interest."

 

Remember, these are just examples, and your clauses should reflect the specifics of your business.

What Happens When the Dissolution Clause is Triggered?

Suppose your Dissolution Clause is triggered. In that case, it initiates a sequence of events typically ending with the dissolution of your company. These events could be settling debts, paying off company obligations, distributing remaining assets as per your clause, and possibly numerous state-specific actions.

 

person typing on a computer

Key Considerations When Writing a Dissolution Clause

When preparing or updating the Dissolution Clause, some key base-stations should be on your route.

  • Clarity: The clearer the clause, the smoother the process. It should specifically outline how assets and debts will be dealt with and any other legalities.

  • Fairness: Ensure the clause is fair to all members to avoid future disputes.

  • Professional Advice: It's always wise to get a legal expert to help you draft or update this clause.

Here's a hypothetical clause that considers external circumstances:

 

Example

"The LLC may be dissolved if a significant event occurs that makes it impossible or impractical to continue the LLC as per the operating agreement. The significant event could be as agreed by the members, including loss of business license, catastrophic financial losses, or protracted legal disputes."

 

Do you need a lawyer for this?

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes (especially if you have multiple owners). But often for single-owner businesses, you don't need a lawyer to start your business.

Many business owners instead use tools like Legal GPS for Business, which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

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