Judicial Dissolution of a Partnership, LLC, or Corporation in California

By February 21, 2015Blog

It is not uncommon for business partners to have a falling out. There are various reasons why this occurs. When it does, often the partners are not on speaking terms and have ceased to cooperate in operating the business. Consequently, one partner may elect to dissolve the business. Judicial dissolution is an effective remedy when the partners cannot reach agreement–either on voluntarily closing down the business or selling out to the other partner.

Even when a partnership agreement, LLC operating agreement, or corporate articles/bylaws exist for your business and they lay out the terms in which your business may be closed, you may not be able to get your business partner(s) to follow the procedures laid out in your governing documents and a judicial dissolution may be necessary.

Dissolving a partnership, such as a limited partnership (LP) or general partnership, only requires an individual partner to show the court that it is no longer practical to carry on the activities of the business pursuant to what is laid out in the partnership agreement. There are many reasons why this may be the case: one of the partners is not fulfilling his or her duties to the partnership; the activities of the partnership have become illegal; the partnership is not adequately funded; and various other reasons.

Asking for judicial dissolution of a California LLC or California corporation however, specifically requires that one of the five following elements is met (they are determined and governed by the California Corporations Code):

  • It is not reasonably practicable to carry on the business in conformity with the Article or Operating Agreement.
    • This means that the LLC or corporation’s business activities cannot be done in a manner that follows the governing documents. This may be because the entity is under-capitalized and the partners refuse to further capitalize it, because of the economy changing, or other reasons.
  • Dissolution is reasonably necessary for the protection of the rights or interest of the complaining members.
    • An example of this may be a minority shareholder or interest holder of the business having his or her rights infringed upon by the majority.
  • The business of the entity has been abandoned.
    • This simply means that the LLC or corporation has stopped doing business and the court must order it to wind down and close out its business affairs.
  • The management of the business is deadlocked or subject to internal dissention.
    • This is a broad category which can include any issue on which the partners or members of the business cannot come to a decision and this failure to come to a decision has left the business unable to carry out its activities.
  • Parties in control have been guilty of, or knowingly permitted, persistent and persuasive fraud, mismanagement, or abuse of authority.
    • This occurs when a partner or member of the business is embezzling funds, committing fraud upon the other members or partners, mismanaging the business, or abusing his or her authority.

As you can see, sometimes dissolving a business in California is not a voluntary endeavor and a court has to step in. When this occurs, you need a skilled business attorney on your side. Our founder, Mr. Sagar Parikh, handles business disputes in Los Angeles and the rest of California involving partnership, LLCs, and corporations. We represent business-owners in Los Angeles, Santa Monica, Malibu, Pasadena, Beverly Hills, West Hollywood, Glendale, Burbank, and the surrounding areas. If you need assistance pursuing dissolution of a corporation or LLC, contact us at Beverly Hills Law Corp., PC today for a free consultation.