By: Michael Balascio and Michelle Rutherford
Legal Corner, a recurring column in Silicon Bayou News, features a discussion of legal issues relevant to entrepreneurs and start-ups. Legal Corner is authored and edited by Michael Balascio and Michelle Rutherford, associates at the New Orleans-based law firm Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. Michael and Michelle have significant experience advising small companies and start-ups with strategic and legal decisions. They are both licensed to practice law in Louisiana – with Michael also licensed in Massachusetts and New York, and Michelle in California. See www.barrassousdin.com for more about their background and experience.
Much of this column has focused on how to create and protect your business. We know, however, that not all businesses last forever and in fact, many startups come to a natural end only a short time after their formation. As well, partnerships initially formed with the best of intentions can reach a point where one partner wishes to leave, or the others wish to see her leave. If the business has come to an end or a partner is on his way to another venture, what are your legal obligations and duties? How do you legally wind-up a business? This column will explore these questions and related issues.
Dissolving and Winding Down Your L.L.C.
Let’s start with winding down an L.L.C. Perhaps you weren’t able to get the level of investment you’d hoped for, or maybe another app or startup beat you to the punch and you want to move on to another venture. If you’ve formed an L.L.C. and registered it with the state, you’ll need to take certain steps to ensure the L.L.C.’s business is properly wrapped up.
For starters, check to see if you have an agreement that lays out the requirements for dissolving your L.L.C. If so, follow those rules. They will typically require a certain percentage vote for dissolution and sometimes lay out requirements for how such a dissolution vote is to take place. If your formation documents do not include these requirements, Louisiana law allows for an L.L.C. to be dissolved by a simple majority vote of the L.L.C.’s membership. Whichever set of rules you follow, ensure the vote is recorded. One good way to document the vote is by using a written consent for dissolution form.
Once you’ve formally voted to dissolve the L.L.C. there are two other things you will likely need to file with the Louisiana Secretary of State: articles of dissolution and an affidavit of dissolution. The Secretary of State provides a form for the affidavit, but not for the articles. Both however, only require basic information, including the L.L.C.’s name, date of dissolution, and how the dissolution was brought about (i.e., majority vote).
In addition to these formal ministerial steps, you must take care to properly wind up the business affairs of the L.L.C. Steps to ensure this process is complete include paying all debts and liabilities of the company and distributing the remaining assets to the L.L.C. members. As always, make sure to consult with a local business attorney regarding which specific wind-up steps will be required for your L.L.C.
Withdrawal and Removing a Partner from the Partnership
Shifting gears for a minute, let’s discuss what options are available to a partnership and an L.L.C. when the business wants to continue, but one partner/member wants to leave or the other partners/members wish that person to go., Again, the first step is to check your formation documents and see what requirements you initially agreed to for these situations.
If you have an L.L.C. and the formation agreement is silent, or if you never had a written agreement, it is likely that default rules apply. In this case, the member wishing to leave the business will be allowed out by a simple majority vote. Note that the member who is wishing to leave will be allowed to have his vote count. So if you have a three-person L.L.C. and two members, including the member desiring to leave, vote in favor of letting him go, he’s free to go. There will need to be an accounting to the departing member and he is likely entitled to, at a minimum, the fair market value of his share at the time of departure.
If you have a partnership where each partner’s term is not time limited and any written formation documents are not to the contrary, any partner is free to leave so long as she provides good faith notice and leaves at a time that is not unfavorable to the partnership.
If you have agreed to term limits for each partner, a partner cannot voluntarily withdraw prior to the expiration of his term without the consent of all the other partners unless another partner fails to perform a material obligation.
In contrast to the more amicable situations described above, if one partner is failing to perform her duties, isn’t contributing in ways initially promised, or has begun taking steps that financially disadvantage the business, you may want to force that person out of the partnership. If you’re operating under a verbal partnership agreement (which is the default if there is no written agreement to the contrary) then a partner may be expelled from the partnership for just cause on a simple majority vote of the partnership. Just cause includes failure to perform obligations, engaging in activities that would prejudice the business of the partnership, and willful or repeated breach of the partnership agreement, even where that agreement is oral.
Again, some kind of accounting will be owed, even to an expelled partner. The Louisiana Civil Code requires the expelled partner be paid an amount equal to his share of the business at the time he is expelled from the partnership. Louisiana courts have interpreted this to mean the fair market value of the business at the time the partner is expelled.
These are just a few of the guidelines, rules, and requirements that you might face when looking at dissolving an L.L.C. or removing a partner from the partnership. Always try to consult with an attorney to ensure you’re not leaving anything out.