Not every business partnership ends with someone buying the others out. Sometimes the relationship deteriorates to the point where no one wants to stay, no one wants to sell, and the only thing the partners can agree on is that they cannot agree on anything. In those situations, the question shifts from how to restructure the business to how to end it properly.
Dissolution is not simply closing the doors. It is a legal process — and doing it wrong can leave partners personally exposed for business debts and obligations they thought they had left behind.
Voluntary Dissolution: The Starting Point
If all partners agree that the business should end, voluntary dissolution is the appropriate path. The process begins with the members or shareholders authorizing the dissolution in accordance with the company’s governing documents — the operating agreement for an LLC, the shareholder agreement or bylaws for a corporation. The vote required depends on what the governing documents say; if they are silent, state law fills in the default.
In New York: An LLC authorizes dissolution under the operating agreement or, absent a provision, by the vote of a majority in interest of the members. The LLC then files Articles of Dissolution with the New York Department of State after completing the winding-up process. A corporation dissolves under New York Business Corporation Law § 1003 by a vote of two-thirds of all outstanding shares entitled to vote, followed by filing a Certificate of Dissolution.
In New Jersey: An LLC dissolves under N.J.S.A. 42:2C-71 by consent of all members or the vote required by the operating agreement, followed by filing a Certificate of Dissolution with the New Jersey Division of Revenue and Enterprise Services. A corporation dissolves under N.J.S.A. 14A:12-4 following a shareholder vote and board resolution.
Winding Down: What Has to Happen Before the Doors Close
Authorization to dissolve is not the end — it is the beginning of the winding-up process. Before any assets can be distributed to owners, the business must complete its pending obligations and deal with its creditors.
Winding up typically involves: completing any ongoing contracts or properly terminating them; collecting receivables; selling or liquidating business assets; paying employees any outstanding wages, benefits, and accrued vacation; filing final tax returns and satisfying any outstanding tax obligations; and canceling leases, licenses, insurance policies, and other ongoing commitments.
Notice to Creditors: A Step Owners Often Skip
One of the most important — and most frequently overlooked — steps in dissolution is providing notice to creditors. Both New York and New Jersey law permit dissolving entities to provide formal written notice to known creditors, setting a deadline by which creditor claims must be submitted. Creditors who receive proper notice and fail to submit a claim by the deadline may be barred from asserting that claim against the dissolved entity or its former owners.
This notice process is not strictly required in all circumstances, but it provides meaningful protection to the owners. A dissolution conducted without creditor notice leaves the door open to claims surfacing after the assets have been distributed — and in some circumstances, former owners can be held personally liable for distributions made when the entity had outstanding obligations it failed to satisfy.
Final Distributions: How Assets Are Divided
Once all creditors have been paid or provided for, remaining assets are distributed to the owners. In the absence of a contrary provision in the operating agreement or shareholder agreement, distributions are generally made in proportion to each owner’s percentage interest in the company.
But the final distribution is not always straightforward. If one partner took excessive distributions during the life of the business, breached their fiduciary duties, violated the governing documents, or engaged in conduct that damaged the company, those claims may offset what that partner is entitled to receive at dissolution. A dissolution agreement — negotiated and documented with the assistance of a business attorney — can address these competing claims as part of the winding-up process, rather than leaving them for subsequent litigation.
When Partners Cannot Agree on Dissolution Either
Sometimes the deadlock extends even to the question of dissolution itself. In those cases, either party may petition a court for judicial dissolution. In New York, LLC Law § 702 permits a member to petition for dissolution if it is not reasonably practicable to carry on the business in conformity with the operating agreement. In New Jersey, N.J.S.A. 42:2C-48 provides a similar remedy. Courts have used this authority to dissolve deadlocked LLCs where the relationship between the members has broken down irreparably.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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