One of the principal benefits of a limited liability company is the insulation it provides its members against personal liability for company debts. It is, however, possible to lose that protection against personal liability. One situation where the members and managers can expose themselves to personal liability for company debts is when the company is dissolved and the members assume responsibility for paying the company’s remaining debts, winding up its affairs and distributing the company’s remaining assets among the members.
Under both Oregon and Washington law, LLC members can incur personal liability to third parties if they improperly wind up their company’s affairs. Statutes in both states articulate specific steps an LLC can take on dissolution to limit the liability of the company to those with known and unknown claims against the company. ORS 63.641; ORS 63.644; and, RCW 25.15.301.
The members remain potentially liable to their company’s unknown claimants for up to five years following dissolution to the extent the company has distributed all of its assets among the members and thus no longer able to satisfy any claim. While each member’s liability is limited to the value of the distribution they each received on dissolution, the potential for such liability can create an unnecessary cloud of uncertainty which can generally be dispelled with a tail policy of insurance for the company to protect against such possible unknown claims.