Cunningham on LLCs: When it’s time for a divorce
What are the steps, hurdles for two-member LLCs looking to split up?
There are about 80,000 active New Hampshire LLCs, and about 60,000 of them have only a single member. Of the remaining 20,000 LLCs, about 15,000 have only two members. My experience suggests that:
The members of most of these two-member LLCs are likely to have equal votes on all LLC matter, and sadly, within a few years, the members of around half of all two-member LLCs, like spousal couples, will want a divorce.
If you are forming or operating a two-member LLC, what should you and your lawyers know about LLC divorces?
- Operating agreements. The New Hampshire LLC Act provides in effect that a two-member LLC can be dissolved and liquidated only if (i) the members comply with the dissolution provisions in their operating agreement if they have such an agreement and if their agreement contains dissolution provisions; (ii) the LLC is dissolved by the New Hampshire secretary of state or by a court; or (iii) the members of the two-member LLC have no operating agreement that addresses LLC divorces but the members themselves dissolve their LLC by majority vote.
- The New Hampshire LLC Act. If, with another individual, you are forming a two-member New Hampshire LLC, it’s critically important that, on your own or with the help of an LLC lawyer, you plan, draft and sign write up an operating agreement that will address the possibility that eventually, you will need an LLC divorce.
For example, you may want to provide in your agreement that if either member believes that the members can no longer operate the LLC profitably and if they cannot agree between themselves how to divide the LLC’s assets and operations, this issue will be decided by a single arbitrator under the Commercial Arbitration rules of the American Arbitration Association.
Furthermore, if you are already operating a two-member LLC and you have an operating agreement, but that agreement doesn’t address LLC divorce, you should amend it to do so.
- Secretary of state LLC dissolutions. It is true that the New Hampshire LLC Act permits LLC members to cause their LLC’s dissolution by the New Hampshire secretary of state by simply not filing their annual New Hampshire registration fees for two straight years. However, the New Hampshire LLC Act provides that LLCs dissolved by the secretary of state may not continue their business; rather, they must wind it up and liquidate it. But the members of many two-member LLCs that need an LLC divorce but lack an operating agreement with good divorce provisions will not want the secretary of state to dissolve their LLC’s business, and thus effectively kill its business. Rather, they will want to continue it as a single-member LLC, of which each member will want to be the only member.
Thus, many members of two-member LLCs whose members cannot agree on key LLC issues and who lack sound operating agreements won’t want to vote to dissolve their LLC. Rather, as indicated, they will want to continue it, but not with the other member.
- Judicial dissolutions. Sadly, members of a two-member LLCs who want an LLC divorce but lack a good operating agreement but who want to continue it as a single-member LLCs will have no alternative to achieve the LLC divorce they want unless they jointly sue for a judicial divorce under New Hampshire LLC Act section 134, I(b). In this suit, they must prove that their deadlock is preventing the LLC from operating “to its advantage” (whatever that may mean); but in this suit, each member must argue that the court should allocate to that member, and not to the other member, most or all of the LLC’s key assets and operations.
However, filing and litigating this suit will cost the members thousands of dollars; resolving it may take many months; and the judge who decides it may well order allocations of its assets and operations between the members that will dismay both members.
In short, like divorces between spouses, divorces between the members of a two-member LLC who lack a good operating agreement won’t be fun.