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.

Why dissolve a limited liability company?

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.

Fact

Possible reasons for dissolution can be agreed upon in the articles of organization when creating an LLC.

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.

The importance of dissolving an LLC?

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.

How to dissolve an LLC

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:

Step 1: Action from LLC members

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.

Step 2: Fill out and file Certificate of Dissolution with the state

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.

Note

The Certificate of Dissolution is filed at different times, depending on which state the business is in. Some states want the document to be filed before creditors are notified and claims are resolved, and others require the document after this process has been completed. Some states require tax clearance for the company before it files this document. The company therefore needs to pay any taxes it owes before completing this step.

Step 3: File federal, state, and local tax forms

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.

Step 4: Notify creditors that your business is closing

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

Step 5: Settle claims from the creditors

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.

Step 6: Distribute the remaining assets

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.

Step 7: Final filing of articles

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.

Note

Your Federal Employer Identification Number (FEIN) should be closed. There are misconceptions that it can be canceled by the IRS, but this isn’t the case. Once a FEIN has been assigned to the company, it’s permanent and never reused or reassigned to another company.

What is liquidation?

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.

What to consider when liquidating your LLC

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.

Liquidation without dissolution

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.

Click here for important legal disclaimers.


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