LLC Dissolution
LLC dissolution is usually handled as it is directed in the LLC Operating Agreement. It might seem that this is obvious and easy to take
care of. However because of the choices that must be made when an LLC is made, this can be a problem. In an LLC, the owner has choices that must be made to qualify the business as an LLC.
I recently handled a case where the daughter of a successful businessman came in with what appeared to be a fairly comprehensive estate plan. The businessman was ill and the family couldn’t find his durable power of attorney in his paperwork. The family business needed on-going direction, so we quickly made a durable power of attorney. His daughter brought him into the office to sign the durable power of attorney, and on the way out I asked if she liked to read.
She said read novels. So I gave her a copy of my book, Protecting Your Financial Future, and told her it read like a novel. Just three days later she called again. After getting into the book, she decided to explore her father’s estate documents a little further. She couldn’t find deeds transferring her dad’s properties into the trust. She knew the deeds were necessary for a good estate plan. No deeds! She called the county recorder and found that all the properties were still in dad’s name, not the trust’s name. Once again we hurried to finish documentation that had been missed by the attorney. We got deeds made in the name of the trust. Dad signed the deeds in an intensive care unit of the hospital.
I could see that the businessman’s health was rapidly deteriorating; now I began to worry. “Let’s face it, what if the power of attorney and been overlooked and none of deeds were made out, what else had the attorney missed?” At this point, I questioned the LLC – for the relatively large family business. A living trust must own the membership interest in the LLC to avoid a probate mess. It was time to figure out if this had happened or if it had also been overlooked. I never even thought about the LLC dissolution.
It took time to get the LLC documents from the accountant, “who had control of everything.” I looked through the LLC documents and was relieved to see that the shares were held by the trust. However, a quick perusal of the LLC operating agreement revealed another serious problem. The LLC operating agreement clearly called for the LLC dissolution upon any LLC member’s death.
I explained this to the daughter and she gasped. Her dad was sole LLC member. The LLC operating agreement had been written so that the LLC dissolution automatically occurred at any member’s death. When this businessman died, the company would be gone. This was a large company and this would never work. It isn’t uncommon to have a provision in the LLC operating agreement that states that when an LLC member dies the LLC dissolution is immediate. In fact, one of my documents in the LLC Wizard set has that provision as a choice. This LLC dissolution provision makes sense for some, however, this would have been a disaster in this case.
I spent another late night at the office making another set of LLC operating documents, with a different set of LLC dissolution clauses. Unfortunately, the businessman was now unable to sign the new LLC operating agreement. So, in the middle of the night we got the designated (agent) in his durable power of attorney to sign on his behalf. It was sad to have to wake the agent, but it had to be done before the businessman died, because the agent named in the durable power of attorney lost his power at the businessman’s death. A durable power of attorney, or for that matter, any power of attorney becomes void upon the principal’s death.
The point of my story is that you must be familiar with your documents and understand what you have so that you can act accordingly.
By Lee R. Phillips
