All good things must come to an end. In my last post, I wrote about lessons that a small business owner, ready to move on to a new venture, could learn from the final episode of “The Colbert Report.” While that post discussed, in general terms, developing an exit strategy that demonstrates that you care about your customers, valuing your business, and approaching a business purchase agreement, this post addresses the very specific issue of concluding the affairs of a limited liability company (“LLC”).
How does an LLC come to an end? The Washington Limited Liability Company Act, codified at RCW 25.15, and the LLC’s operating agreement will together govern the necessary steps for winding down and dissolving an LLC. To terminate an LLC’s existence, the LLC’s members or manager must first dissolve it and file a Certificate of Dissolution. After dissolution, the LLC will exist solely for the purpose of winding up its affairs. Finally, if the LLC is an out-of-state entity doing business in Washington, it must follow additional steps for cancellation of its Certificate of Formation.
The business is closed, its assets are sold, why bother continuing to follow the rules? In a nutshell: protection from liability. After all, isn’t that the point of an LLC? Washington law puts a three-year time limit on claims against a dissolved LLC, its managers, and its members, but per a 2010 amendment to the law, the clock only begins to run when a Certificate of Dissolution is filed.
Two recent decisions by Washington courts demonstrate why it is critical to follow the statutory requirements for dissolution of a LLC in order for its members to enjoy protection from individual liability. In Houk v. Best Development & Construction Company, Inc., homeowners (the Houks) filed a lawsuit in 2010 against the builder who constructed their home in 2004, an LLC that had been administratively dissolved by the Secretary of State in 2006. The LLC never filed a Certificate of Dissolution. Division III of the Court of Appeals dismissed the case. It reasoned that the requirement that a Certificate of Dissolution must be filed for the three-year limit on lawsuits against the LLC only applied to LLCs dissolved after the 2010 statute became effective. Because the LLC in this case had dissolved in 2006, four years before the legislature passed the law requiring the additional filing, the court dismissed the case because the Houks filed suit more than three years after the LLC had been administratively dissolved.
By contrast, in Zacks v. Arden Drywall & Texture, Inc., Division I of the Court of Appeals refused to dismiss claims in a lawsuit filed in 2012 by homeowners (the Zacks) against an LLC involved in the construction of their home that had been administratively dissolved in 2008 without filing a Certificate of Dissolution. How is this different from Houck? Here, the LLC was dissolved just two years before the new law requiring a Certificate of Dissolution for the three-year limitation on claims against the LLC was passed. Thus, the three-year statute of limitations on claims against the LLC was still in effect when the legislature passed the statute.
While both these cases involved questions of whether a 2010 change in law would apply to LLCs that had been dissolved before the law passed, there are lessons to be learned by companies contemplating dissolution. First, you need to follow the statutory requirements for the dissolution process. Second, even after dissolution, you must be aware of possible changes in state law that may affect the rights of the LLC and its members, at least until the limitation period for claims against the LLC has passed. Dissolving an LLC is a complex process, and it is important to have good legal advice. We’re always happy to help business owners end their current venture in the right way, so they can move on to the next adventure life has in store.