HOW TO DISSOLVE A LIMITED LIABILITY COMPANY IN CONNECTICUT

Limited Liability Companies in Connecticut, and every other state, are created by statutory law. General Statutes Title 34 governs the creation and governance of LLC’s in Connecticut. Specifically, General Statutes sections 34-206 sets forth the means of dissolving an LLC. The LLC may be dissolved by:

  1. At the time or upon the occurrence of events specified in writing in the articles of organization or the operating agreement;
  2. If not provided in writing under #1, then by affirmative vote, approval, or consent of at least a majority in interest of the members; or
  3. By the entry of a judicial decree of dissolution.

The operating agreement for an LLC is the document the members execute to govern the affairs of the LLC. Many times they are drafted by an attorney. Operating agreements are not required. However, they are a good idea for a variety of reasons, including the issue of dissolution. It is also a good idea to have an attorney draft the operating agreement rather than resorting to Legalzoom. I have seen many instances of operating agreements from Legalzoom that simply do not cover the likely problems members of an LLC face when there is more than one member.

If members of an LLC do not have an operating agreement that defines how the company may dissolve and wind up its affairs, then by law the decision is controlled by General Statutes. This essentially means a majority vote can dissolve the LLC.

I recently came across an operating agreement for an LLC that covered many aspects of the affairs of the LLC, but it left out dissolution. As such, the members of the LLC faced a situation where a super majority (two thirds in this case) was required to permit a transfer of interest, but a simple majority would suffice for dissolution. The minority members had bargained for some ability to have input on transfer of interests, but neglected to address dissolution. The failure to address it in the operating agreement in this particular circumstance provided leverage for the holder of the simple majority interest.

If a member desires to dissolve an LLC but does not have majority control, or the required interest necessary under an operating agreement, then the last resort is what is called “judicial dissolution.” Under General Statutes section 34-207, a trial court in Connecticut can grant an application to dissolve an LLC “whenever it is not reasonably practical to carry on the business in conformity with the articles of organization or operating agreement.” Again, there is a specific reference by the legislature to the operating agreement. A member moving for dissolution likely needs to show the trial court that the other members are not carrying on the business in accordance with the governing document for the LLC.

One circumstance where a trial court likely will grant dissolution is where the members are in a deadlock. Deadlock tends to happen when the voting interests of the LLC are equal (i.e. 50/50 ownership) and there is no ability to break the deadlock. You see deadlocks mostly when there are two or more partners and the interests are divided equally such that the opposing sides have equal interests. If a dispute occurs, and the members did not address a means of breaking a deadlock in the operating agreement, then a member can seek to file a lawsuit in superior court requesting that the court dissolve the LLC.

Once an LLC is dissolved the company must wind up its affairs. The person winding up the affairs of the LLC may prosecute or defendant lawsuits on behalf of the LLC, settle and close business, dispose of and transfer property, discharge the liabilities of the LLC, and distribute any remaining assets. In the event of a lawsuit for or against an LLC, an attorney will be necessary to represent the LLC. The LLC essentially continues to exist during its winding up phase and can bring a lawsuit or face a lawsuit. Winding up may also require the LLC to make adequate payments to creditors followed by debts owed to the members and/or return of capital to the members. Winding up may also be addressed in the operating agreement.

Dissolving A Corporation Under Connecticut Law

Under Connecticut law, there are various methods attorneys may use to dissolve or terminate a corporation.  It is referred to as dissolution of the corporation.  A dissolved corporation continues its corporate shell existence but stops carrying on business except where necessary to wind up the affairs of the company.  Winding up typically involves liquidation by collecting assets, disbursing assets, selling of assets and property, and discharging liabilities.

Corporate dissolution is governed by Connecticut General Statutes Chapter Title 33, Chapter 601, Part XIV.  Dissolution can be accomplished by any of the following:

  • Dissolution by the original incorporators or directors under Connecticut General  – voluntary
  • Dissolution by the board of directors and shareholders – voluntary
  • Dissolution by the Secretary of State – administrative
  • Dissolution by a shareholder proceeding in court – judicial
  • Dissolution by a creditor proceeding in court – judicial
  • Dissolution by a company proceeding in court – judicial

The first two methods are known as voluntary dissolution.  Typically, this means the company directors propose dissolution to the shareholders of the company.   The board typically notifies the shareholders of a meeting to address dissolution.  If the proposal passes, a certificate of dissolution is filed with the Secretary of State.  A company may elect to revoke the dissolution with 120 days by following the same procedure.  A company may have a transaction or business law attorney assist with the necessary documents and voting records.  The company may then proceed with winding up the affairs of the company which requires following the statutory requirements for effective dissolution.

Administrative dissolution typically occurs when the company has failed to maintain a registered agent or to file required reports with the Secretary of State.  For example, if the company fails to file an annual report for more than one year, the Secretary of State may take action and send notice to the company of the deficiency and potential for dissolution.  If there is no response or the deficiencies are not fixed, the Secretary of State of Connecticut may then prepare and file a certificate of dissolution.  Although these forms can be maintained without an attorney, some clients prefer to have a business attorney file the required reports.

Judicial dissolution is started with a lawsuit in court and typically involves litigation attorneys representing the shareholder or shareholders and the company.  Although an individual shareholder can bring an action in court by himself or herself (referred to as “pro se”), shareholders tend to hire attorneys based on the complexity of the proceeding.  Under court rules, the company must have an attorney.

The form of a judicial dissolution lawsuit is varied, but typically you have either a deadlock with management or a disgruntled or oppressed shareholder.  A deadlock occurs in cases of 50/50 control of a company and two groups of shareholders or directors are deadlocked in the management of corporate affairs.  The oppressed shareholder claims are based on a claim of unfairness with respect to ownership of shares in the company.  These cases are sometimes referred to as shareholder oppression actions, freeze out actions, or squeeze out actions.  These terms refer to a claim based on minority shareholder rights as the cases are brought by minority shareholders.

Connecticut General Statutes section 33-896 sets forth that a superior court judge may order dissolution when a shareholder brings an action and can prove 1) that there is a deadlock in management or an inability to elect directors; 2) there is shareholder oppression; or 3) the corporate assets are being wasted.    Seems simple enough.  However, there are complexities to these claims and the parties typically vigorously defend their positions.  Experts are often needed for damages, accounting, and forensics.  Many times, shareholder oppression actions end up on Connecticut’s complex litigation docket.  On this docket, the parties, attorneys, and litigants are subject to a specific set of procedural rules and the case is assigned to one judge for the length of the case.

This post is only an outline of typical examples and there are many details to each aspect of the statutory framework for dissolution.  Before seeking dissolution, shareholders should consider consulting an attorney.  Regardless of involving a lawyer, a shareholder may want to become familiar with the statutory framework for dissolution, the by-laws of the company, shareholder agreements, and the certificate of incorporation.  In a later post, I will go through some of the various types of judicial dissolution actions including oppression claims and the applicable defenses.