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October 12, 2016

Dissolving a California Limited Liability Company Will Be Easier in 2017, or Will it?

Under existing law, a California limited liability company, or LLC, may be dissolved, and its activities wound up, if, among other things, a majority of the members of the LLC votes to dissolve, unless the LLC’s articles of organization or operating agreement provide for a higher percentage. This majority requirement means that, for LLCs with only two members, if one member wants to dissolve the LLC, but the other wants the LLC to continue to operate, dissolution would require one member to seek a judicial dissolution–a costly and time-consuming process.

Effective January 1, 2017, the law governing the dissolution of California LLCs will be amended to provide that a LLC may be dissolved, and its activities wound up, if, among other things, 50% or more of the members of the LLC vote to dissolve, unless the LLC’s articles of organization or operating agreement provide for a higher percentage.

The change in the law is designed to make it easier for two-member LLCs to dissolve. According to the author of the new law, many small businesses are organizing without the assistance of legal counsel and do not fully appreciate the consequences of forming an LLC with equal ownership. If the members in an equal, two-member LLC do not agree to dissolve (i.e., are unable to achieve a majority vote), the result could be time consuming and costly litigation for judicial dissolution. The author of the new law indicates that this change in the law will maintain flexibility for LLCs to shape their articles and operating agreements in the manner that works best for them, while eliminating the unpleasant “surprise” existing law may hold for two-member and other small LLCs who are unaware that their dissolution can be far more complex than if they had formed as another type of business entity (such as a corporation, where only 50% shareholder approval is required for dissolution).

For existing limited liability companies with written operating agreements that address the vote threshold for dissolution, however, the new law will not have that effect unless the operating agreement is amended to change the majority requirement to 50% or more. Further, while California limited liability companies could provide that, on or after January 1, 2017, the holders of 50% or more of the members may cause the dissolution of the LLC, members of a LLC may resist such a provision. To illustrate, if Jane and Bob operate a two-member LLC that has become successful, would either Jane or Bob want the other to have the absolute right to dissolve the LLC, thereby putting the brakes on all future profits and operations? In most cases, the answer would be “no.” Nor would most members of a two-member LLC want to form a LLC which could be dissolved by the other member at any time.

Please contact any member of the Boutin Jones Corporate and Securities Group if you have any questions regarding this new law.