Owner’s Liability After Your LLC is Closed or Dissolved?

April 25, 2017 Asset Protection, Business planning Comments Off on Owner’s Liability After Your LLC is Closed or Dissolved?

Many business owners wonder whether their LLC will protect them from claims and liabilities after their LLC is closed. Does the limited liability protection of the LLC still apply? Does it only apply for claims when the LLC was active? What about after the LLC is closed or dissolved? What if the claim is about something that arose when the LLC was in good standing but was something you never knew and filed after the LLC is dissolved?

Here are a five tips that answer these questions and that will help you decide when to dissolve your LLC.

First, when you close an LLC, a process known as dissolution, you must pay known/present LLC creditors before distributing assets and profits to the owners of the LLC.  If you fail to pay known creditors of the LLC and if you instead distribute assets of the LLC to the owners, then the owners can be sued by those creditors to collect on the assets distributed from the company.  Part of the process of properly dissolving an entity includes sending notice to known creditors.  In other words, if the LLC has current debts/liabilities and/or known creditors, you can’t simply “shut down the doors”, take all of the assets personally, and refuse to pay the creditors.   If the LLC is insolvent (i.e. the debts exceed the assets) and if there are no assets distributed to the LLC owners, then their is no personal assets which a creditor can pursue against the LLC owners.

Second, dissolve the LLC once business operations have ceased and once known creditors have been paid or otherwise resolved. If you have known creditors in your business, you cannot close down an LLC for the sole purpose of evading those creditors and then re-open your business with another LLC if it’s essentially the same business. As a precautionary measure, if you are aware of a liability issue but you are unsure whether it is a legitimate claim, you should wait until the statute of limitations for that potential claim has passed until you dissolve the LLC.

Third, follow the LLC operating agreement and/or state statutes regarding the voting rights required for dissolution and for the order of events to dissolve an LLC. A common order of events is as follows; pay-off all known creditors, return contributed capital to the members, distribute profits/assets to the members.  Many states have a notice requirement to creditors of the LLC which can actually be helpful in some cases to shorten the time limit they may have to file a claim. If you have known creditors you will want to send them notice of the dissolution to shorten the period upon which they have to file a claim for the assets of the LLC.

Fourth, if you dissolve the LLC when no known/present LLC creditors exist, the owners of the LLC are still afforded the protection from creditors for any claims that arose when the LLC was in good standing.  For example, if you dissolved your company in 2015 and were later sued in 2017 for an act that occurred in 2014, then so long as the company was unaware of the incident giving rise to the claim then the members of the LLC would be personally protected from the liabilities of the business.

Fifth, if you are aware of a potential liability (no judgement or lawsuit exists) and dissolve the LLC, the members may be personally liable up to the amount distributed from the LLC upon dissolution. This situation was the 2014 case of CB Richard Ellis v. Terra NostraIn this case, an LLC failed to pay a commission to their broker pursuant to a listing agreement and then dissolved their LLC. The real estate broker eventually obtained a judgement against the dissolved LLC and was able to pursue the members of the LLC for the liability of the LLC up to the amounts distributed to the LLC owners.

In Sum, if the purpose of the LLC has legitimately come to an end, and there aren’t any known/present creditors, then depending on the laws in your state and your situation, you may decide either to (a) keep the LLC open until, for example, the statute of limitations runs out, or (b) shut down the LLC so long as it was in existence and in good standing during the time in which the business had operations. If you dissolve the LLC when there are known/present creditors, the members of the LLC will generally be liable for amounts distributed from the LLC to the owners.

Note:  This article, like all of our articles, is to provide some general guidelines – always get specific advice for your situation.

About the author

Kevin is an associate attorney at the Phoenix, Arizona office of Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”). Kevin’s practice areas include real estate, securities and raising capital, self directed IRA law, business entity formation, and estate planning. His experience prior to joining KKOS lawyers allowed him to focus on representing the small business owner in many facets of the law, including business transactions and litigation, real estate matters, bankruptcy, and estate planning. Kevin is a zealous advocate for his clients and has a passion for finding solutions to their problems.