QUESTION ON Member Resignation and Dissolution of LLC
Hello, I am a member of the 8-mo. old 4-member LLC, where so much disagreement occurred between members before business could get off the ground, that no business began and members no longer communicate. This has been going on for about 6 months and all requests to unanimously dissolve the LLC have gone ignored by the other members. At this point I am looking for a way out, but the challenge is that LLC allows no member resignation without “liability” (see paragraph below)… So, how can I resign without being liable, or could I even be liable for anything if the company is doing no “known” business; and if liability exists, what is it generally entails or limited to if nothing is explicitly specified in the OA?
Operating Agreement states: “Except as otherwise expressly provided herein, a Member may not resign from the Company without violating this Agreement and any Member who resigns in violation of this Agreement shall be liable to the Company for damages as provided in the Act.” Act = Colorado Limited Liability Company Act, which states: “7-80-602 – Resignation of member. Unless prohibited in a written operating agreement, a member may resign from a limited liability company at any time by giving written notice to the other members, but, if the resignation violates the operating agreement, the limited liability company may recover from the resigning member damages for breach of the operating agreement and offset the damages against the amount otherwise distributable to him. ”
Lastly, I also have a question about whether taxes need to be filed for this company (it has done no “known” business whatsoever, we did not even open a bank account) and how can this be completed if members refuse to communicate?-
-Daniel H. Colorado
I am sorry to hear about your predicament. Yours is a cautionary tale of what can go wrong in a partnership, and it demonstrates why it is so important for an LLC to adopt a carefully crafted operating agreement. The argument could be made that the care that should be taken when selecting a marriage partner should also be taken when we choose our business partners. But I don’t need to tell you that.
The statute you cited does not specify whether the damages that may be recovered from the resigning member of an LLC are actual damages, punitive damages or damages of another variety (see Nolo.com’s glossary for legal definitions of the various types of damages at http://www.nolo.com/definition.cfm/term/A50A9EFC-8E6F-4B16-ABCAD9C0DD51CDEF ) . Actual damages are awarded in a lawsuit as compensation for actual injury or economic loss and are intended to make the injured party “whole”, or bring him to the position he was in before the injury or loss. It is not clear to me what damages, if any, would result from your resignation given the current situation.
Aside from resignation, however, you make a good argument for dissolving the LLC: How can the LLC conduct business if its members refuse to communicate?
In most states, there are three types of dissolution: Voluntary, administrative and judicial. Voluntary dissolution typically requires the approval of all of the members of the LLC and involves filing articles of dissolution at the state level. Administrative, or “involuntary”, dissolution is usually initiated by the state due to the failure of the LLC to comply with annual reporting requirements and/or pay its annual tax or registration fee. In a judicial dissolution, an LLC is dissolved in a proceeding by a judge or attorney general.
Section 7-80-810 of the Colorado Statutes addresses judicial dissolution and states, in part: “A limited liability company may be dissolved in a proceeding by or for a member or manager of the limited liability company if it is established that it is not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement of said company.” You should consult an attorney to determine whether pursuing judicial dissolution is an advisable option for you.
As to whether it is necessary to file a tax return for your partnership LLC, instructions for the IRS Form 1065 partnership tax return states that every domestic partnership must file an income tax return–unless it neither receives income nor incurs any expeditures treated as deductions or credits for federal income tax purposes. See Form 1065 Instructions at http://www.irs.gov/pub/irs-pdf/i1065.pdf for more information.
Recommended Resources on How to Form LLC:
- LLC or Corporation?: How to Choose the Right Form for Your Business
- Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less
- Nolo’s Quick LLC: All You Need to Know About Limited Liability Companies
- Form Your Own Limited Liability Company
- How to Handle Resignation of LLC Member
- What is a Partnership: Types of Partnerships?
- What is a Limited Liability Company (LLC)?
- Choosing an LLC Structure for Your Business
- How to Form LLC or LLP for a Start-Up Home Business