Recent Legislation May Ease LLC “Divorces”

CORP - July 5It is always a best practice for persons forming a limited liability company (an LLC) to agree in advance about terms of separation, how to end the relationship in case they become unable or unwilling to remain co-owners of the LLC. These provisions, which could be thought of as an LLC-owners’ “prenup,” are usually set out in the Company Agreement of the LLC. However, sometimes the Company Agreement does not contain adequate terms for owners separating themselves from each other or from the LLC. If the Agreement is inadequate, owners have always had another remedy, which is a lawsuit asking a court to order a termination of the LLC.

Section 11.314 of the Texas Business Organizations Code (the law that deals with LLC’s and other business entities — sometimes called the TBOC) provides that a court can order the winding up and termination of a Texas LLC. Under the current law, this can only happen if the court finds that it is not “reasonably practicable” to carry on the LLC’s business under its governing documents. It is not clear when discord or lack of cooperation among owners makes it no longer “reasonably practicable” to carry on the LLC’s business. This uncertainty may have discouraged unhappy LLC owners from seeking a court ordered termination.

This situation changed somewhat this year when the Texas legislature amended the TBOC (effective September 1, 2017) to expand the reasons a court can order a termination of an LLC. Under the new law, the court can also order the termination of an LLC if it finds that the economic purpose of the LLC is likely to be unreasonably frustrated or when an owner has engaged in conduct that makes it not reasonably practicable to carry on the business with that owner. When problems arise with an LLC that lead an owner to want a “business divorce” from another owner, there are usually allegations of bad actions by the other owner. By adding bad owner conduct to the list of ways a court can terminate an LLC, the legislature has hopefully made it a little easier for an owner to exit from an LLC relationship that the owner wants to end.

This article was written by Cliff Ernst. For more information regarding this post, he can be reached at cernst@gdhm.com.

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