Dis­solv­ing a limited liability company: how to wind up your business

A limited liability company is usually founded and then exists for an unlimited time. But sometimes life doesn’t always go as planned and the company needs to be dissolved. There are various reasons that can lead to this; economic failure isn’t always the reason. The company owner may vol­un­tar­i­ly decide to dissolve the company, or the Secretary of State may have made the decision if the business failed to pay taxes. In order to dissolve a limited liability company, there are a few steps that need to be taken; you can’t just quit doing business. It can be a complex process, but an LLC must formally terminate. If you don’t com­plete­ly cancel the business, it will still be liable for taxes and annual reports and can also still be sued.

The decision to dissolve a limited liability company is not always of the founder’s free will. Economic reasons, but also legal or personal cir­cum­stances may require the company to close down. Here are some possible reasons:

• Low cash flow
• Mis­man­age­ment
• Negligent ac­count­ing practices
• Bank­rupt­cy
• Defective products
• Partner dis­agree­ments
• Suc­ces­sion-planning failure

Other reasons could be that the owners think a different legal form would perhaps prove to be more suitable for achieving the company’s ob­jec­tives (i.e. a cor­po­ra­tion) or maybe the share­hold­ers want the business to go in a different direction i.e. have a different business purpose. A dis­so­lu­tion may be:

Judicial: a court can dissolve a business for failure to comply with state laws or failure to pay its taxes. More common, however, is judicial dis­so­lu­tion as a result of a lawsuit brought by dis­grun­tled LLC members who wish to unravel their business ties.

Ad­min­is­tra­tive: imposed by the Secretary of State's office. It is usually the result of failing to either comply with state law or file an annual report. The power of the Secretary of State, however, is broad, and in many states, an LLC can be dissolved for nearly any reason the Secretary deems fit.

Voluntary: as a result of members willingly choosing to close their business. This can happen in two ways. First, members can determine certain dis­so­lu­tion-triggers (such as the death of a member), which are written into the LLC operating agreement. Second, members can cast a vote to dissolve the company at any time.

If your reason for dis­solv­ing the LLC is to form a cor­po­ra­tion, make sure to check the state rules to transfer. Some states allow LLCs to be converted to cor­po­ra­tions without having to go through the long dis­so­lu­tion process and sub­se­quent corporate formation.

When you have formed your LLC, you will have filed documents with the state, the Internal Revenue Service, and possibly state/county tax and licensing au­thor­i­ties to let them know that your business is up and running. Unless you tell them otherwise, all these au­thor­i­ties will presume you’re still trading and will expect annual reports to be filed, and annual fees and taxes to be paid, etc. This is why it’s so important to dissolve your company correctly.

By dis­solv­ing an LLC properly, it means that the LLC is no longer a legal business entity so you won’t be expected to pay any fees or taxes, or file any more documents. Despite no longer operating, it is possible for members to create a new LLC and run it in the same way as the dissolved company.

According to the Internal Revenue Service (IRS), an LLC is a “business structure allowed by state statute.” It isn’t enough to simply liquidate, sell the business’ assets, and inform clients; you need to dissolve your company in the correct legal way.

Dis­solv­ing an LLC is different in every state, but there are several general steps that every business owner should take no matter what state they operate in. Here are the seven general steps to follow:

When it comes to limited liability companies, the members must grant the dis­so­lu­tion to show that everyone is on the same page. The smaller the company, the more likely the members are to be involved with daily pro­ce­dures so they know what is best for the business. Unlike with cor­po­ra­tions where the board of directors must draft and approve the dis­so­lu­tion with share­hold­ers then voting on the outcome, the process isn’t as strict with LLCs. It is suggested to document your decision and get the members’ approval.

After the company members have voted for dis­so­lu­tion, you’re now required to file paperwork with the state in which the business was reg­is­tered. If the company also did business in other states, paperwork needs to be filled out for these as well. Remember to cancel licenses and permits.

Just because your company isn’t trading anymore, it doesn’t mean you can forget about taxes. The IRS needs to be told as well as your state and local taxing agencies. There is a closing a business checklist on the IRS website so work out which documents apply to you. You also shouldn’t forget the payroll if you have employees that still need to be paid. An ac­coun­tant or tax advisor can help out with this.

There are several points you need to take into account when notifying your creditors by mail:

• Explain that your LLC has been dissolved or has filed the statement with intent to dissolve
• Enclose the e-mail address that creditors must send their claim(s) to
• List the in­for­ma­tion that needs to be included in any claims
• State the deadline for sub­mit­ting claims (120 days from the date of the notice is usual)
• Explain that claims won’t be accepted if received after the deadline has passed

Claims accepted by the company must be paid or the company at least needs to come to an arrange­ment with the creditor regarding repayment. Once they know about the situation, creditors may even be willing to settle for a lot less than the original amount stated. If you reject a claim, the creditor must be told in writing. It helps to have an attorney to advise you on how to go about this.

After paying and settling what you need to, the remaining assets can be dis­trib­uted to the owners of the company depending on how big their share of ownership is. If you own 70% of the company and someone else owns 30% then the assets will be shared 70/30. The IRS must be told of this.

Make sure to file the Articles of Dis­so­lu­tion (or your state’s equiv­a­lent) with the Secretary of State for the state in which your company was formed. You need to disclose the LLC’s name, the active date of dis­so­lu­tion, and the reason for the dis­so­lu­tion. The form can be found on the Secretary of State’s website and a small filing fee is required.

The final tax return needs to be submitted, so make sure to file it with the IRS and state tax au­thor­i­ties. Once these steps have been completed, the existence of the entity is ter­mi­nat­ed. You’re required to file and retain all the paperwork from the dis­so­lu­tion for a minimum of six years.

There is sometimes confusion as to what liq­ui­dat­ing an LLC actually means. It’s not a different way to close down the business, but rather another step in the dis­so­lu­tion process. Once the company ac­tiv­i­ties are wound up, you can dis­trib­ute the remaining assets (as mentioned above in step 6) or you can sell your assets. Liq­ui­da­tion is the complete sale of the business’ assets. Many company owners choose this option when they need to close the business fast and no other option (such as a merger or acquiring emergency capital) is available. This is known as voluntary liq­ui­da­tion. Com­pul­so­ry liq­ui­da­tion is where the courts force liq­ui­da­tion of the LLC. Since many busi­ness­es aren’t able to pay off their oblig­a­tions, they choose to sell their assets to pay off share­hold­ers and creditors.

It’s important to know how much assets cost and to find the right buyer. This can cost time and resources that many companies do not have (this could even be the reason that the business is closing) so many owners won’t get the correct price for the assets and might have to sell them at a much lower price. Liq­ui­da­tion sales come in different kinds of formats: ne­go­ti­at­ed buyouts, con­sign­ment sales, and auctions, so work out which is best for your company.

If liq­ui­da­tion is voluntary, you can hire a liq­uida­tor to help with the process. It’s important to hire an impartial person so that creditors get paid in priority order and employees receive fair com­pen­sa­tion. Once the liq­uida­tor gets hired, the owners lose their power, therefore it’s now the liq­uida­tor’s re­spon­si­bil­i­ty to dispose of all property owned by the company.

It is possible to go through the whole process i.e. cease trading, sell assets, and pay off creditors without properly dis­solv­ing. The reason behind this is that the business can keep its legal identity to use for another project. If the business has a strong brand recog­ni­tion then it’s a shame to lose it.

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