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Breaking Up is Hard to Do: Dissociation of a Member or Dissolving an LLC, What's the Difference?

Assume you and your business partner of 10 years have suddenly had a falling out and can no longer work together; what are your options?

Dissociation of a Member

A member of an LLC may be dissociated for many reasons including unanimous vote of other members if it is unlawful to carry on the business of the LLC with that member, the member executed an assignment of their membership interest for the benefit of creditors, or the member files for bankruptcy. In the event of dissociation, the LLC continues to operate and the membership interest held by the dissociated member or the former member's successor in interest is not affected. When a member is dissociated from a limited liability company, that member is divested of all rights as a member to participate in the management or operation of the company. Simply put, the dissociated member is expelled from the company, but does not forfeit the value of his/her ownership interest.

Dissolving an LLC

On the other hand, choosing to dissolve the LLC winds up of the affairs of the business and distributes any remaining assets of the company to the members. The Virginia Code allows a member of an LLC to apply to the circuit court where the registered office of the limited liability company is located for a judicial dissolution if is "not reasonably practical to carry on the business in conformity with the articles of organization." Unless provided otherwise in the articles of organization or operating agreement, the members may wind up the LLC's affairs except that, on "cause shown," the circuit court may appoint a liquidating trustee who may prosecute and defend suits, wind up the LLC's business, dispose and convey the LLC's property, discharge any remaining liabilities, and finally, distribute to the members any remaining assets of the LLC.

What should I do?

The first place to start is to read your LLC's controlling documents the operating agreement and articles of incorporation. Any definition of what events will cause a members dissociation and/or dissolution of the company will control. If the operating agreement is silent, the Virginia Code substitutes in a statutory foundations for either dissociation or dissolution. If it is possible to either dissociate your partner from the LLC or dissolve the company, you must decide what goals you seek to accomplish: Is it possible to operate the LLC without your partner? Do you mind if your partner continues to make a profit on their share of the LLC, even not participating in the operations? It is important to review these considerations with your attorney prior to deciding a course of action and our business law team would be happy to discuss these and any other questions you have about your legal rights as a member or shareholder in a business.

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