Dissolving an LLC or Breaking
a Business Deadlock in New York.

Judicial Dissolution of an LLC: The Statute

LLC Law 702 is one sentence long. On application by or for a member, the Supreme Court in the judicial district where the LLC's office is located "may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." If the court orders dissolution, the applicant files a certified copy of the order with the Department of State within thirty days.

Everything turns on the phrase "not reasonably practicable," which the statute does not define.

The Standard: Matter of 1545 Ocean Avenue

The leading case is Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121 (2d Dept 2010). Two members each owned half of an LLC formed to buy and redevelop a commercial property. The managers fought over costs and one wanted out. The trial court dissolved the company; the Appellate Division reversed.

The court held that a member seeking dissolution must establish, in the context of the operating agreement, that "(1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible" (72 A.D.3d at 131). It called dissolution "a drastic remedy" (id.). On the facts, the project was weeks from completion and the operating agreement let either manager act alone, so the company could still do what it was formed to do.

Three practical lessons come out of that decision:

• The operating agreement is the measuring stick. The question is whether the company can carry on under its own agreement, so the analysis starts there (72 A.D.3d at 128).
• Disagreement is not enough. Members who argue, even bitterly, have not proved that the company cannot function.
• Corporate and partnership grounds do not carry over. The court refused to import dissolution grounds from the Business Corporation Law or the Partnership Law into the LLC Law (72 A.D.3d at 126-127).

Deadlock in an LLC

For a corporation, deadlock is a ground for dissolution in its own right. For an LLC it is not. The 1545 Ocean court said so directly: deadlock is an independent basis under BCL 1104, but "no such independent ground for dissolution is available under Limited Liability Company Law § 702." Instead, the court looks at the managers' disagreement "in light of the operating agreement and the continued ability" of the company to function (72 A.D.3d at 129).

In practice, a 50/50 LLC whose operating agreement requires both members to agree, and whose members have stopped agreeing on anything that matters, is a strong candidate for dissolution. A 50/50 LLC whose agreement lets either manager act alone, or that still generates income and pays its members, is a much harder case. The agreement and the company's actual operations decide it.

Deadlock in a Corporation: BCL 1104

Corporate deadlock has its own statute. Under BCL 1104(a), the holders of shares representing one-half of the votes entitled to elect directors may petition for dissolution where the directors are so divided that the votes required for board action cannot be obtained, where the shareholders are so divided that they cannot elect directors, or where internal dissension has split the shareholders into factions so divided that dissolution would benefit the shareholders. Under BCL 1104(c), any voting shareholder may petition where the shareholders have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired.

A minority shareholder who is not deadlocked but is being mistreated proceeds under a different statute, BCL 1104-a. See Minority Shareholder Rights in New York.

Dissolving a Partnership: Partnership Law 63

For a general partnership, Partnership Law 63(1) directs the court to decree dissolution on a partner's application in several situations, including where a partner "has been guilty of such conduct as tends to affect prejudicially the carrying on of the business," where a partner "wilfully or persistently commits a breach of the partnership agreement" or conducts himself so that "it is not reasonably practicable to carry on the business in partnership with him," where the business "can only be carried on at a loss," and where "other circumstances render a dissolution equitable." A partner who has been wrongfully excluded from the business also has a right to a formal accounting under Partnership Law 44.

Dissolution as Leverage

Most owners who talk to me about dissolution do not want the business liquidated. They want out at a fair price, or they want the other side out. A well-supported petition, filed after the records have been reviewed and the operating agreement has been read closely, is often what moves a stalled buyout negotiation. A weak petition does the opposite: it invites a quick denial and leaves the other side with the upper hand. Whether to file, and when, is the most important decision in the case.

Talk to a Business Dissolution Lawyer in New York

Send me the operating agreement, shareholders' agreement, or partnership agreement, and a short account of where things stand. I will tell you whether the facts meet the standard for your type of entity and what I would do first.

Related: LLC Member Disputes  ·  Minority Shareholder Rights  ·  Frozen Out by Your Business Partners  ·  Partnership and LLC Disputes  ·  Shareholder Disputes

Attorney Advertising. Prior results do not guarantee a similar outcome. The information on this page is general and is not legal advice. Consult an attorney about the specific facts of your matter. Law Office of Frederic R. Abramson, 160 Broadway, Suite 500, New York, NY 10038. 212-233-0666.

Frequently Asked Questions