Business divorces happen all the time. However, they are easier to achieve in New York State when your entity is a corporation or partnership. Limited liability companies are more challenging, particularly when the members don’t or won’t agree to go their separate ways. When all else fails, a judicial dissolution may be the only option: but they are hard to obtain.
The judicial dissolution of a limited liability company (LLC) is a legal process in which a court orders the dissolution of the LLC after assessing various issues, including mismanagement, fraud, breach of fiduciary duty, among other things. But the main issue in New York is whether the business has the ability to carry on its business.
Proving that a LLC cannot carry on its business is incredibly hard to do in New York State. The standard Operating Agreement language, or the LLC law if your entity does not have an operating agreement, makes it very hard to request judicial dissolution because a member of the LLC must demonstrate, with evidence, that the LLC is no longer capable of carrying on its business. Judicial dissolution is not granted solely because a member thinks that the management of the LLC is oppressive, fraudulent, or illegal. Most times, the parties simply disagree with how to run the business. But that does not mean that the business is unable to continue operating. Simple deadlock or disagreement among members is generally insufficient.
Even if you can satisfy the high burden to prove that judicial dissolution of a LLC is proper, judicial dissolution presents a number of challenges.
First, there is the risk of potential disruption to the business operations of the LLC. While the court may appoint a receiver to oversee the dissolution process and protect the assets of the LLC, the receiver may not have the same level of expertise or knowledge as the members of the LLC, which could potentially impact the day-to-day operations of the business.
Second, the potential impact of judicial dissolution on the LLC's relationships with third parties, such as customers, suppliers, and lenders, is a challenge. The dissolution process may create uncertainty or disruption that could affect these relationships and reduce the value of your business.
Third, another challenge with judicial dissolution is the time and cost involved. The process can be lengthy and expensive, as it requires the involvement of attorneys, legal fees, and the court system. This can be particularly burdensome for small LLCs with limited resources, especially if the LLC is already facing financial difficulties.
Finally, a fourth challenge is the risk of an unfavorable outcome for the members of the LLC. The court may order the dissolution of the LLC in a way that is not favorable to the members, such as by distributing the assets in a manner that does not reflect their expectations or interests.
In summary, judicial dissolution of an LLC in New York State is incredibly hard to do. If you can meet the high burden of proving entitlement to judicial dissolution, then even “winning” that argument can present a number of challenges, including time and cost, disruption to business operations, impact on relationships with third parties, and the risk of an unfavorable outcome for the members. Top of FormIt is important for LLCs and their members to understand the potential challenges and consider other options, such as voluntary dissolution, before pursuing judicial dissolution.
Yes, it is challenging when members cannot communicate effectively or reach agreement. There are strategies, however, that you can follow to prevail.
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Additionally, read more about Business Divorces here.