LLC Winding Up Disputes in California: Control of the Wind-Up and the Order of Payment

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Winding up is the stage after a California LLC dissolves, when its assets are collected and sold, its debts are paid, and the remainder goes to the members. The managers who did not wrongfully dissolve the company run that process, or the members if there are none. Creditors are paid first, including members who are creditors. A member who watches a co-member sell assets and pay himself may petition a court to order the winding up. (Corp. Code, §§ 17707.04, 17707.05.) Kolmogorov Law, P.C. represents members and managers in these disputes.

Call (909) 235-6116 or contact us online to discuss a contested LLC wind-up.

What LLC winding up is and when it starts

Dissolution is the trigger and winding up is the work. An LLC is dissolved, "and its activities shall be wound up," on the first of four events. They are an event stated in the written operating agreement or the articles, a vote of 50 percent or more of the voting interests, 90 consecutive days with no members, and a court decree. The articles or a written operating agreement may require a greater percentage for the vote. (Corp. Code, § 17707.01.)

Even an LLC that has filed its certificate of cancellation continues to exist to wind up its affairs, prosecute and defend actions, dispose of its property, and collect and divide its assets. It may not continue business except as needed for winding up. (Corp. Code, § 17707.06, subd. (a).) The filings themselves are covered in our guide on how to dissolve an LLC.

Who controls the wind-up

The statute sets an order. The managers "who have not wrongfully dissolved" the company may wind up its affairs. If there are none, the members do it. If the dissolution came by court decree, the decree governs. (Corp. Code, § 17707.04, subd. (a).)

Two duties come with the job. The persons winding up must mail written notice that winding up has begun to all known creditors and claimants whose addresses appear on the company's records. (Corp. Code, § 17707.04, subd. (a).) They are entitled to reasonable compensation, unless the articles or a written operating agreement say otherwise. (Corp. Code, § 17707.04, subd. (c).)

Fiduciary duties do not end at dissolution. The duty of loyalty expressly covers "the conduct and winding up" of the company's activities. A manager, or a member of a member-managed LLC, must account for any profit or benefit derived in the winding up and must not deal with the company on behalf of an adverse interest. (Corp. Code, § 17704.09, subds. (b), (f).) A manager who sells the company's equipment to his own new business at a price he picked ordinarily has both problems. The operating agreement may specify how many members can approve such a transaction after full disclosure of all material facts. (Corp. Code, § 17701.10, subd. (c)(14).)

The order of payment in an LLC wind-up

Creditors come before owners. The remaining assets may be distributed to members only after all known debts and liabilities have been paid or adequately provided for. That includes debts to members who are creditors of the company. (Corp. Code, § 17707.05, subd. (a).)

What is left then goes to the members in three steps, unless the articles or a written operating agreement provide otherwise. First come distributions the company already owes to members. Second is the return of the members' contributions. Third is the balance, in the proportions in which the members share distributions. (Corp. Code, § 17707.05, subd. (a)(1)-(3).)

A member who made a documented loan is a creditor, and that debt is paid or provided for before any distribution to members. A member who invested capital recovers it at the second step. A co-member who takes cash first because he "put in more work" finds no tier for that in the statute. Reasonable compensation for services, including the wind-up itself, is a separate matter and is not a distribution. (Corp. Code, §§ 17704.05, subd. (g), 17707.04, subd. (c).)

When a court takes over the winding up

A court may step in on petition. Any manager, any member or members, or three or more creditors may ask. The test is whether a court-ordered winding up "appears necessary for the protection of any parties in interest" in the company. The decree names who will wind up: the managers or members or, for good cause, another person. (Corp. Code, § 17707.04, subd. (b).)

Court supervision changes the timing. No distribution may be made until any period the court has set for presenting claims has expired. (Corp. Code, § 17707.05, subd. (b).)

Faster tools exist when assets are leaving now. A member can seek a restraining order or injunction against further sales, or the appointment of a receiver. A claim for an accounting forces the person in control to show where the money went.

Money that went out too early

An LLC may not make a distribution that would leave it unable to pay its debts as they come due. (Corp. Code, § 17704.05, subd. (a)(1).) A manager, or a member of a member-managed LLC, who consents to a prohibited distribution is personally liable to the company for the excess. So is a recipient who knew of the violation, to the extent of the excess received. The action is barred four years after the distribution. (Corp. Code, § 17704.06, subds. (a), (c), (e).)

Creditors have their own claim. They may pursue members to the extent of the company assets distributed to them on dissolution. (Corp. Code, § 17707.07, subd. (a)(1)(B).) Our page on suing a dissolved company covers that side.

Property omitted from the winding up continues in the canceled company for the benefit of those entitled to it. It is used first for unsatisfied known liabilities, and any excess goes to the members. (Corp. Code, § 17707.06, subd. (c).)

If you are the member watching the wind-up

Ask in writing for the creditor notice, the list of assets, and the terms of each sale. The winding-up sections do not end a member's right to inspect records, explained on our page about LLC books and records. Object in writing to any sale to an insider. If the answers do not come, the petition for a court-ordered winding up is the next step.

If you are the manager or member running it

Send the mailed notice to known creditors. List the debts before paying anyone. Sell assets on terms an outsider would accept. Before buying anything yourself, disclose the terms in full and get the other members' written consent. Pay outside creditors and member loans before any return of capital. Keep a ledger that another person could follow.

What to bring to the first meeting

Bring the operating agreement, the articles, and the vote, consent, or decree that dissolved the company. Add the balance sheet at dissolution, the list of creditors, bank statements since that date, and records of every asset sold and every payment to a member. Include any loan documents between a member and the company.

Frequently asked questions

Our LLC is dissolved but my co-member is selling assets and paying himself first. Who controls the wind-up?

Under California Corporations Code section 17707.04, the managers who did not wrongfully dissolve the LLC wind it up, or the members if there are no such managers. That authority does not include paying oneself ahead of creditors. Any member may petition the court to order and oversee the winding up when that is necessary to protect the parties in interest.

Who gets paid first when an LLC dissolves in California?

Creditors. California Corporations Code section 17707.05 allows distributions to members only after all known debts and liabilities are paid or adequately provided for, including debts owed to members who are creditors. The remainder then covers distributions already owed, the return of contributions, and finally the members' shares of what is left.

Can a member be paid for winding up the LLC?

Yes, within limits. California Corporations Code section 17707.04 entitles the persons winding up an LLC to reasonable compensation, except as the articles or a written operating agreement provide otherwise. The amount has to be reasonable for the work of the wind-up. It is not a license to take a larger share of the company's remaining assets.

I loaned money to our LLC before it dissolved. Do I get repaid before the other members receive anything?

Generally yes. Under California Corporations Code section 17707.05, debts and liabilities to members who are creditors of the LLC are among the debts that must be paid or adequately provided for before the remaining assets are distributed to members. Proof matters: a note, ledger entries, or tax reporting that shows a loan and not a capital contribution.

Can a court supervise the winding up of a California LLC?

Yes. Under California Corporations Code section 17707.04, any manager, any member, or three or more creditors may petition. The court may order the LLC wound up if that appears necessary to protect any parties in interest, and may name who conducts it. In a court-supervised winding up, distributions wait until any claims period the court has set expires.

Talk to a California LLC dispute attorney

To discuss a disputed wind-up or the division of a dissolved company's assets, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is a business litigation firm in Irvine, California. Related pages: partnership and LLC disputes, how to dissolve an LLC, and receivership in a business dispute.

This page provides general information about California law and is not legal advice. Outcomes depend on the operating agreement, the company's records, and the court.