Dissolution of Connecticut LLC Does Not Automatically Transfer Assets to LLC’s Members

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Dissolution of Connecticut LLC Does Not Automatically Transfer Assets to LLC’s Members

Lawyers sometimes misunderstand the consequences of an LLC’s dissolution. Dissolution does not terminate the existence of an LLC. A dissolved LLC’s members and managers continue to be its members and managers, and must wind up the LLC’s business. The dissolved LLC continues to own its property until it is sold or distributed to the members.

A claim by an LLC’s managing member that the LLC’s dissolution automatically transferred its property was a central issue in a recent accounting malpractice case. Mukon v. Gollnick, 92 A.3d 1052 (Conn. App. Ct. June 24, 2014) (per curiam).

Background. Mark Mukon was the managing member of Sea Pearl Marine, LLC, a Connecticut limited liability company. The LLC purchased a ship’s hull in 2007 in order to construct a complete vessel, and paid Connecticut sales tax on the hull.

Connecticut LLCs must pay an annual $250 filing fee to the state, and in 2009 Mukon asked his accountant how he could avoid paying the annual fee. His accountant advised him that he could avoid the fee by dissolving the LLC, and that the only tax consequences would be capital gains taxes when the vessel was sold. Mukon accordingly dissolved the LLC, and his accountant assisted in filing the dissolution paperwork with the state.

After the dissolution Mukon re-registered the vessel in his own name with the Connecticut Department of Motor Vehicles. Shortly thereafter the Department of Revenue Services audited the transaction, determined that there was no exemption, and assessed use taxes, penalties, and interest, which Mukon paid. (The use tax is complementary to the sales tax, and is assessed when sales tax is not collected.)

Mukon later sued his accountant for malpractice. He claimed that the tax became payable when the vessel was automatically transferred upon the LLC’s dissolution, contrary to the accountant’s advice that the dissolution would not result in any tax liability other than capital gains upon the vessel’s sale. The trial court accepted Mukon’s theory, found that the accountant had committed professional malpractice, and awarded damages to Mukon. The accountant appealed.

Appellate Court. The court’s analysis turned on its review of the Connecticut LLC Act’s dissolution provisions. A dissolved LLC continues to exist but must be wound up. Its managers or managing members must, in the name of the LLC, settle and close the LLC’s business, dispose of and transfer the LLC’s property, discharge its liabilities, and distribute any remaining assets to the LLC’s members. Conn. Gen. Stat. §§ 34-20634-208. The court found the statute to be clear: the LLC’s dissolution started a winding-up process, but dissolution alone did not transfer any assets.

The dissolution of a limited liability company does not … result in an automatic transfer of the limited liability company’s assets to one of the individual members. Instead, the dissolution necessitates a prescribed winding-up process, and a member receives the limited liability company’s property if, and only if, the member or manager winding-up the limited liability company has completed the applicable steps established by § 34-208(b) and the assets are distributed in accordance with § 34-210.

Mukon, 92 A.3d at 1055.

Mukon’s malpractice cause of action was predicated on his theory that the use tax became due and payable when the vessel was automatically transferred upon the LLC’s dissolution. The court rejected his theory and therefore reversed the trial court’s malpractice award.

Comment. It seems odd that Mukon hung his whole case on the theory that the LLC’s dissolution transferred the LLC’s property. After all, an LLC’s dissolution initiates the winding-up process, and the statute requires that the LLC’s assets be sold or distributed to the members after all debts and liabilities have been satisfied. In other words, dissolution made the transfer of the boat inevitable, and the transfer resulted in the use tax being assessed. So the accountant’s advice that the dissolution would not result in sales or use taxes appears to have been incorrect.

In any event, the case is a good review of the rules for dissolving and winding up an LLC. It’s also an example of the adage, “penny wise and pound foolish.” $250 a year seems like a modest price to pay to keep an LLC in existence.

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