Continuity of Life, Withdrawal of Members, and Dissolution

Continuity of Life

What is meant by the continuity of life is, essentially, perpetual continuation without regard to any member’s withdrawal, expulsion, or death? The majority of state Limited Liability Company statutes provide for the dissolution of a Limited Liability Company upon a member’s death, disability, bankruptcy, or withdrawal. For that reason, most Limited Liability Companies lack the corporate characteristic of continuity of life, unless their operating agreement substantially changes the effect of a member’s withdrawal upon the Limited Liability Company’s continued existence. Most state Limited Liability Company statutes also limit a Limited Liability Company’s duration to thirty years, but this limitation does not affect the determination of the Internal Revenue Service as to whether a Limited Liability Company lacks continuity of life.

Withdrawal of Members

Members may withdraw from a Limited Liability Company unless they are limited by the operating agreement or articles of organization. A member usually has to provide the Limited Liability Company written notice of his intentions of withdrawing. If a withdrawal violates the operating agreement, then the withdrawing member may be liable to the other members or to the Limited Liability Company for any damages associated with it. State law commonly set forth circumstances under which a member may withdraw from a Limited Liability Company. In most states, a member may withdraw only he provides six months’ written notice of his intention to withdraw. In other states, a Limited Liability Company is unable to prevent a member’s withdrawal.

Unless the withdrawal is unlawful, a withdrawing member is usually entitled to a return of his capital contribution to the Limited Liability Company. Some Limited Liability Companies will instead pay a withdrawing member the fair market value of his membership interest. The operating agreement will typically provide for the method and manner of payment of a withdrawing member’s interest. These issues are governed by State law.

Dissolution


Dissolution means the legal end of a Limited Liability Company’s existence. In most states, a Limited Liability Company will legally dissolve upon a member’s death, disability, withdrawal, bankruptcy, or expulsion. Such occurrences are also referred to as disassociations. Other circumstances bringing about dissolution include bankruptcy of the Limited Liability Company, a court order, or the fulfillment of the Limited Liability Company’s stated period of duration.

The majority of states provide for a Limited Liability Company’s continuation after a member’s disassociation or withdrawal. Continuation after a member’s disassociation requires that the unanimous consent of the remaining members. In some states, it’s required that the articles of organization or operating agreement allow for the business’ continuation after a member’s disassociation. Some states allow a Limited Liability Company’s articles of organization or operating agreement to require the continuation of the business after a member’s dissociation even if the remaining members do not provide unanimous consent.

Should a Limited Liability Company dissolve, state law and the company’s operating agreement usually outline the process for winding up Limited Liability Company’s business? In this process, the Limited Liability Company will pay its remaining creditors off and distribute any assets that remain to its members. Priority is given to the Limited Liability Company’s creditors. Although members may be creditors, they are not creditors in determining the members’ distributive shares of remaining assets. Only after the Limited Liability Company pays off its creditors, it distributes remaining assets to its members, either in proportion to the members’ shares of profits or under some other arrangement that is outlined in the operating agreement. After a Limited Liability Company concludes its business, most states require that the company file articles of dissolution.

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