Turner Padget Insights

Judicial Dissolution of an LLC: Why You Need a Prenupt

Posted On Dec 05, 2014

The formation of an LLC could be viewed like a business marriage in which members join their respective interests to attain mutual objectives. Keeping the analogy going, it’s a marriage that needs a prenuptial. Members who form or join an LLC may have every intention to keep the LLC going indefinitely, but as life happens and problems arise, dissolution of the entity may be in everyone’s best interests. If the LLC’s operating agreement clearly defines the why’s and how’s for voluntary dissolution (what we mean by prenuptial), the process to windup the company can be relatively easy and accomplished without the need for judicial involvement. However, without a clearly articulated plan, LLC members may be forced to have their entity dissolved through judicial action.

Bases for judicial dissolution of a South Carolina-based LLC are identified in the South Carolina Uniform Limited Liability Company Act of 1996. They include when:

  • The economic purpose of the company becomes unreasonably frustrated or it becomes impractical to continue the business under the current Articles of Organization or operating agreement. (For instance, the LLC’s primary product or service dramatically changed since the company’s inception.)
  • A member’s business conduct makes it impractical to carry on the company's business with that member.
  • The company did not purchase the distributional interests of a dissociated member.
  • The managers or controlling members have acted unlawfully, fraudulently or otherwise unfairly oppressed or prejudiced a member.
  • Under limited circumstances, a transferee of a member’s interest requests dissolution.

While the SCULLCA limits an Operating Agreement’s ability to restrict members’ right to seek judicial dissolution, the Act does not contain any restrictions on any provisions detailing actions that would constitute the voluntary dissolution of the company.  Since South Carolina LLC law does not restrict methods for voluntary dissolution, LLC’s have more reason to ensure their operating agreement clearly defines these steps. Judicial dissolution can be expensive, time-consuming and can reduce the market value of member shares. Being thoughtful at the outset of LLC formation and developing a comprehensive operating agreement can go a long way toward avoiding the courts.