I came across this situation that seemed counterintuitive to me. In a multiple member LLC where all but one member is choosing to leave the LLC to pursue other endeavors and the remaining member would like to continue the business as though nothing changed (same name, same brand, same vendors, etc), I was told that it could be more beneficial to simply dissolve the LLC. Not easier because the process is overwhelming and involves a lot of paperwork, but actually beneficial.
Being the curious sort, I chose to investigate the matter to find out when that is true. I do not have all of the facts from the actual person who brought this hypothetical to my attention and, frankly, I do not want all of the facts. I want to know for future clients and for my own edification. Every business and every situation will be different and calls for slightly different solutions; however, I would like some baseline knowledge to start with. Since every business and every person is a beautiful and unique snowflake, please do not take anything in this as legal advice.
Why is this important? The life of a new company tends to be tumultuous while the business owner(s) figure things out. Members change, products change, visions change. It is useful to know how to best handle the changes so that you incur the least cost, so that the least amount of time is spent dealing with the changes, and so that your business or future jobs are the least impacted.
My initial findings: With the above facts, I could find NO reason to dissolve your LLC instead of simply creating a new Operating Agreement and running with it.
It *might* be a beneficial option if the LLC has taken on a lot of debt and the members are attempting to limit how much they owe…that was the only avenue I came up with.
As I said, though, every person and every business is unique. So, if one or more of the members have other businesses, there may be tax implications to consider as well.
If anyone has enlightening information, please do share! Otherwise, I will file this away in the “guess my gut instinct was right” category.
UPDATE: So, after looking at the IRS website in a very cursory manner, there may be federal tax implications.
- A more than 50% change of ownership of a partnership may be considered a dissolution and reformation by the federal government regardless. LLC’s are a state-recognized business entity but not a federal entity. LLC’s not choosing an S-Corp election are automatically classified as either a partnership or a disregarded entity depending on the number of members. The 50% rule probably affects LLC’s taxed as partnerships. Therefore, that is one possible reason for dissolving the LLC and reforming it – the fact that federal government is going to act like you did that regardless.
- I have not done a thorough search yet of the State system, but I have looked into it and there does not seem to be a tax or time benefit to dissolution.
