Dissolution of Businesses in District of Columbia, Virginia, Maryland, Delaware and California
Some businesses simply don’t make it. In our last entry on business dissolution, we cited some reasons why small business owners may decide to dissolve a business. The procedures that a small business must follow differ depending on where you may have organized your company. In this post, we will summarize the procedures for dissolving your limited liability company (LLC) in some of the more popular jurisdictions where our clients have organized their small businesses. We focus on LLCs as the vast majority of small companies are organized as LLCs rather than corporations.
Related article: Calling it a Day: LLC Dissolution
District of Columbia Dissolution
Dissolution of a limited liability company in the District of Columbia.
As a first step in dissolving your DC LLC, you should review its operating agreement and its articles of organization with your small business attorney. Either of these documents may specify a time or event for when and how the business can be dissolved. For example, the operating agreement may include a particular date of dissolution or a specific number of votes of the members or managers required to close the business.
If not specified, a DC Limited Liability Company can be dissolved by consent of all the members, or the passage of 90 consecutive days during which the company has no members. In DC, under certain circumstances, members can also petition a court for a judicial dissolution. If you are voluntarily dissolving the company, then usually you file a one page document with the DC Department of Consumer and Regulatory Affairs (DCRA).
Winding up the affairs of a DC LLC
The next step in terminating the LLC is winding up its activities and affairs. At this stage, the LLC is already dissolved. A dissolved DC limited liability company in this phase is required to discharge its debts, obligations, or other liabilities, settle and close the company’s activities and affairs and marshal and distribute the assets of the company.
The DC Code provides guidance on how to wind up the affairs of the LLC when there is no governing operating agreement. The assets are applied to the obligations of creditors, including members. After that, any surplus is distributed to its members in the following order; first, to each person owning a transferable interest that reflects contributions made by a member and not previously returned, an amount equal to the value of the unreturned contributions; and then in equal shares among members and dissociated members. D.C. Code Section 29-807.05.
Revocation of status of a DC LLC
If a DC LLC fails to pay necessary fees and biennial reports on time, DCRA will revoke its status. DC Code § 29-106.02. Fees and penalties add up while you are administratively dissolved. It is not certain from any statute or case law whether the District can go after LLC members for back fees although we do not know of any case of this happening. The more significant question is if there are outstanding creditors and the company is not properly dissolved, when the time within which claimants can file a claim starts—in other words, it is possible that a claimant can try to press a claim against the dissolved LLC and possibly against its members long after the business has closed down.
Dissolution of a Business in Maryland
The process of dissolving a Maryland limited liability company is very similar to that in the District of Columbia.
As a first step in dissolving your Maryland LLC, you should review its operating agreement and also its articles of organization, just like you would do in DC. Either of these documents may specify a time or event when and how the business can be dissolved. Md. Code, Corps. & Ass’ns § 4A-902(a)(1).
For example, your LLC’s operating agreement may include a particular date of dissolution or a specific number of member or manager votes required to close the business. If not specified, a Maryland LLC can be dissolved with the unanimous consent by the members or the passage of 90 consecutive days during which the company has no members.
Without unanimous consent, under certain circumstances, any individual member can seek a judicial dissolution, where a court determines whether the LLC can reasonably operate and remain compliant with the articles of organization or operating agreement. Once a Maryland is dissolved upon the happening of one of these events, an LLC must begin winding up its affairs.
Filing articles of dissolution for a Maryland LLC
After a dissolution, but before termination, members of the LLC may but are not required to file articles of dissolution with the State Department of Assessments & Taxation (SDAT). Filing articles of dissolution is optional. If you have questions about whether to file, you should consult with a small business attorney.
Winding up the affairs of a Maryland LLC
Regardless of whether you file articles of dissolution, the next step in terminating your Maryland LLC is winding up its activities and affairs. Before the LLC can file articles of cancellation, which is the final step in terminating a Maryland LLC, it must first send notice of its termination to all known creditors by registered mail.
Under the Maryland LLC act, the key winding up tasks include distributing assets to creditors to fully satisfy LLC liabilities and then distributing remaining assets to LLC members in proportion to their capital contributions to the company. Md. Code, Corps. & Ass’ns § 4A-906.
Final step–filing articles of cancellation
To terminate its existence, a dissolved Maryland LLC that has wound up its affairs must file articles of cancellation with SDAT either: more than 19 days after sending notice to known creditors or at any time, if the LLC has no known creditors (Md. Code, Corps. & Ass’ns § 4A-910.)
Revocation of status of a Maryland LLC
If a Maryland LLC fails to pay required taxes or make an employment insurance contribution or reimbursement plan and biennial reports on time, it will expire through inaction. Fees and penalties add up while you are administratively dissolved. It is not certain from any statute or case law whether the State of Maryland can go after LLC members for back fees although we do not know of any case of this happening.
Virginia Dissolutions
As a first step in dissolving your Virginia LLC, as with the other states, you should review its operating agreement and also its articles of organization, just like you would do in DC. An LLC dissolves by unanimous written consent of its members, the entry of a decree of judicial dissolution or at the time or upon the happening of any event or events specified in the articles of organization or operating agreement. Va. Code Ann. § 13.1-1046.
Note, that unlike an LLC in Maryland or DC, a Virginia LLC does not automatically dissolve with the dissociation of its last remaining member but continues in existence and may admit members thereafter. Va. Code Ann. § 13.1-1038.1.
Winding up the affairs of a Virginia LLC
The next step in terminating an LLC in Virginia is winding up its activities and affairs. At this stage, the LLC is already dissolved. A dissolved Virginia limited liability company in this phase is required to discharge its debts, obligations, or other liabilities, settle and close the company’s activities and affairs and marshal and distribute the assets of the company.
The Virginia Code provides guidance on how to wind up the affairs of the LLC when there is no governing operating agreement. The assets are applied to the obligations of creditors, including members. Va. Code Ann. § 13.1-1035, 1048, 1049. After that, any surplus is distributed to its members in the following order; first, to the current and former members in satisfaction of liabilities for distributions, and then to members first for the return of their contributions and second with respect to their proportionate interests. LLCs may take advantage of a statutory notice and publication procedure to dispose of known and unknown claims after dissolution and prior to cancellation. Va. Code Ann. §§ 13.1-1049.1, 13.1-1049.2. Giving notice to known creditors to its known claimants is required, whereas giving notice of dissolution to unknown creditors (in newspaper, for instance) is optional.
Final step–filing articles of cancellation
To terminate its existence, a dissolved Virginia LLC that has wound up its affairs, it must file articles of cancellation with the State Corporation Commission.
Automatic cancellation
If you do not dissolve properly, your Virginia limited liability company will be automatically dissolved three months after the due date of your annual registration fee if it is unpaid. Immediately after the due date, delinquent LLCs are penalized $25, which shall be added to the amount of the annual registration fee due. The annual registration fee with penalty and interest is enforceable, though it is not clear whether the Commonwealth can go after LLC members for back fees although we are not aware of any instance of this happening. The more troubling issue is that if there are outstanding creditors and if the company is not properly dissolved, the automatic cancellation of an LLC does not impair any remedy available to or against the LLC or its members or managers for any right or claim existing, or any liability incurred, before the cancellation. Va. Code Ann. VA Code Ann. § 13.1-1050.5. Nevertheless, the members of an LLC remain shielded from personal liability based on actions of the LLC even after it is cancelled. Va. Code Ann. § 13.1-1050.2.
Business Dissolutions in Delaware
As a first step in dissolving your Delaware LLC, as always you should review its operating agreement and its articles of organization. An LLC can dissolve by the vote or consent of members owning more than two-thirds of the interests in the LLC. Unlike many other states, Delaware does not require unanimous consent to dissolve an LLC), at any time when there are no members the entry of a decree of judicial dissolution by the Court of Chancery or at the time or upon the happening of any event or events specified in the articles of organization or operating agreement. Code Ann. tit. 6, § 18-801.
Winding Up
The next step in terminating the LLC is winding up its activities and affairs. At this stage, the LLC is already dissolved and can start winding up the company’s affairs by discharging its liabilities and distributing its assets. A Delaware limited liability company that has dissolved must pay current creditors and a reserve fund needs to be set up for future creditors, spanning 10 years. Del. Code Ann. tit. 6, § 18-804.
When an LLC is winding up the assets should be distributed first to creditors (including members and managers); then to members and former members to satisfy liabilities for distributions as set out in the LLC agreement or on their resignation; and then to members first for returns of their contributions and then for their interests in the limited liability company proportionate to their share in the distributions.
Final step–certificate of cancellation
After dissolving and winding up your LLC, you must file a certificate of cancellation with the Delaware Secretary of State (SOS).
Automatic cancellation
If you do not dissolve properly, your Delaware LLC can expire through inaction—for instance, when it fails to pay franchise tax. A limited liability company that does not pay its franchise tax fees for three years in a row will be cancelled by the state. 6 Del C. §18-1108. If there are outstanding creditors and if the company is not properly dissolved, the automatic cancellation of an LLC does not impair any remedy available to or against the LLC or its members or managers for any right or claim existing, or any liability incurred, before the cancellation. Del. Code Ann. tit. 6, § 18-1107. Nevertheless, the members of an LLC remain shielded from personal liability based on actions of the LLC even after it is cancelled. Del. Code Ann. tit. 6, § 18-1107.
California Dissolution Procedures
Generally
As a first step in dissolving your California LLC, as always, you should review its operating agreement and also its articles of organization. If not specified how an LLC is dissolved, an LLC in California may be voluntarily dissolved by the vote of 50% or more of the voting interests of the members of the LLC or upon the passage of 90 consecutive days during which the LLC has no members.
If the vote to dissolve is unanimous only the Certificate of Cancellation needs to be filed with the California Secretary of State. If the vote is not unanimous Certificate of Dissolution must be filed with or before the certificate of cancellation. Members can also seek judicial dissolution under certain circumstances.
Winding Up
The persons winding up the affairs of the limited liability company need to give written notice of the commencement of winding up by mail to all known creditors and claimants whose addresses appear on the records of the limited liability company. After determining that all the known debts and liabilities of a limited liability company in the process of winding up, including debts and liabilities to members who are creditors of the limited liability company, have been paid, the remaining assets can be distributed among the members. Cal. Corp. Code § 17707.05.
Final step–certificate of cancellation
After dissolving and winding up your LLC, you must file a certificate of cancellation with the California Secretary of State.
Automatic cancellation
If you do not dissolve properly, your LLC in California can be automatically suspended as the result of the members who neglected to file Statements of Information with the Secretary of the State, or file returns with or pay amounts due to the Franchise Tax Board, or both. In that case, before a suspended LLC can be dissolved, it first must be revived by paying amounts due together with accrued interest. Failure to comply with the State’s requirements will result in indefinite suspension until revived. Note the difference with other state in that in California there is no automatic cancellation after a certain period of time of a suspended LLC in California. Unless under certain circumstances, the tax board cannot hold a member liable for LLC unpaid taxes. It is also not certain from any statute or case law whether members of a Californian LLC that has been suspended can be sued in the name of the LLC.