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Forfeiture of a Charter: Additional Issues That Arise for LLC's

When the Maryland State Department of Assessments & Taxation (the “SDAT”) forfeits an entity’s charter, that entity can no longer transact business in Maryland. While losing the right to transact business creates problems for any type of entity, there are some additional issues specific to LLCs.

For example, the Maryland General Corporation Law (the “Corporations Act”) provides that upon the revival of a corporation’s charter after forfeiture, all contracts and other acts done in the name of the corporation while the charter was forfeited are validated and all assets and rights of the corporation are restored. The Maryland Limited Liability Company Act (the “LLC Act”), however, does not have a similar provision. Therefore, it is unclear what effect actions taken during forfeiture have and whether the assets and rights of the LLC are automatically restored upon reinstatement of the charter.

The Corporations Act also provides that, upon forfeiture of the corporation’s charter, the directors of the corporation become the trustees of the assets of the corporation for purposes of liquidation until a court appoints a receiver. The LLC Act, however, does not have a similar provision. Therefore, it is unclear who has the authority to liquidate an LLC’s assets upon forfeiture.

Because of the many problems that arise upon forfeiture of a charter, it is extremely important to keep your LLC in good standing. If your LLC is not in good standing or its charter is forfeited, you should act as soon as possible to bring it back into good standing. It is also worth considering adding a provision to your LLC’s operating agreement addressing who has authority to liquidate the LLC’s assets upon forfeiture. While a court is not obligated to find that such provision is binding, it may still be persuasive to the court.

For more information, please contact Chip Sturm at sturm@bowie-jensen.com.

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