The decision to dissolve a limited liability company is not always of the founder’s free will. Economic reasons, but also legal or personal circumstances may require the company to close down. Here are some possible reasons:
- Low cash flow
- Mismanagement
- Negligent accounting practices
- Bankruptcy
- Defective products
- Partner disagreements
- Succession-planning failure
Other reasons could be that the owners think a different legal form would perhaps prove to be more suitable for achieving the company’s objectives (i.e. a corporation) or maybe the shareholders want the business to go in a different direction i.e. have a different business purpose. A dissolution may be:
Judicial: a court can dissolve a business for failure to comply with state laws or failure to pay its taxes. More common, however, is judicial dissolution as a result of a lawsuit brought by disgruntled LLC members who wish to unravel their business ties.
Administrative: imposed by the Secretary of State's office. It is usually the result of failing to either comply with state law or file an annual report. The power of the Secretary of State, however, is broad, and in many states, an LLC can be dissolved for nearly any reason the Secretary deems fit.
Voluntary: as a result of members willingly choosing to close their business. This can happen in two ways. First, members can determine certain dissolution-triggers (such as the death of a member), which are written into the LLC operating agreement. Second, members can cast a vote to dissolve the company at any time.