Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC. In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information. When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.
There are many instances when an LLC is administratively dissolved, yet it continues to operate. This often occurs when the LLC is not aware of the administrative dissolution. An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform. This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement. When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member. The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State. Still, the issue remained whether or not the single member was personally liable.
The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease. By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution, the LLC was essentially never dissolved in the first place. The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities. This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated. Also, the court highlighted the purpose of the LLC Act: to limit personal liability. A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.
The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability. The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved. By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.