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Most limited liability companies (LLCs) don’t last forever. Whether by choice or necessity, you may find yourself wondering how to close an LLC. The process generally includes getting member buy-in, filing dissolution paperwork with your state, and paying any outstanding taxes and debts.
Find out more about the process so you don’t inadvertently miss any important steps.
Key Points
• A limited liability company (LLC) may go through a voluntary or involuntary dissolution.
• States typically require tax balances to be paid in full before approving the dissolution of an LLC.
• Liquidated assets must be used to pay off outstanding creditors in order to avoid legal issues.
• Not dissolving your LLC according to your state’s requirements can leave you open to future problems, even if your LLC is inactive.
What Is the Dissolution of an LLC?
The dissolution of an LLC is what happens after the owner (or owners) make the decision to close the business.
There can be many reasons why LLC members choose to dissolve their company. Maybe they’re ready to retire or the business is no longer profitable and they want to move onto something else. Other reasons can include irreconcilable disagreements among the owners, bankruptcy, or simply the need to switch the LLC to a different type of business structure.
In some cases, an LLC is closed because a triggering event occurs. Triggering event parameters are included in the business’s operating agreement and may include a member vote, the death of a member, or fulfillment of the business’s purpose.
How to close an LLC depends on the reason behind the dissolution, particularly whether it’s voluntary or involuntary.
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Voluntary vs Involuntary Dissolution
When the members of an LLC make their own decision to dissolve it, the process is called a voluntary dissolution. The benefit is that the owners stay in control of when to close the business’s doors. It also gives a clear timeline to customers and creditors instead of leaving anyone in the lurch.
An involuntary dissolution stems from either legal or regulatory issues. There are two types. An administrative dissolution can result when the LLC doesn’t meet legal requirements and the state forces it to close. A judicial dissolution results from a court order and could include a small business bankruptcy.
Recommended: Sole Proprietorship vs. LLC
How To Close an LLC
Wondering how to dissolve an LLC? You can follow these five steps.
Step 1: Vote To Dissolve and Review Your Operating Agreement
If there’s more than one member in your LLC, you must formally decide to close the business with a vote. Check your operating agreement to see what specific requirements you must follow. For example, there may be a dissolution clause stating that the majority interest must vote to close or that the decision must be unanimous.
Step 2: File Articles of Dissolution With Your State
Next you must file dissolution documents with the state in which your LLC is incorporated. Otherwise, you may continue to be responsible for taxes and filing responsibilities.
Every state has a different process for what’s required. Typically, you can find the exact details online from the Secretary of State, Business Bureau, or Business Agency. Once you file, you may need to pay a fee as well as any unpaid taxes before your LLC dissolution can be approved.
Step 3: Notify Creditors and Tax Authorities
Before you permanently close your doors, you must notify both your creditors and tax authorities (including federal and state agencies). Be prepared to pay off any remaining debts the LLC owes to creditors, suppliers, and other vendors. You can send a certified letter informing them that their final claims for payment must be received by a certain date.
The IRS requires that you file a final tax return for the year you close your business and pay any outstanding taxes owed. You must also pay final employee wages and provide them with W-2 forms. Also be sure to terminate any retirement plans or pensions that were available to employees. Check with your state’s specific taxation requirements as well. You may be required to get final tax clearance from the state’s taxation department.
Recommended: Small Business Tax Deductions
Step 4: Distribute Remaining Assets to Members
Start by taking an inventory of the LLC’s remaining assets, including real estate, vehicles, inventory, or equipment. Then sell the assets and use the cash, prioritizing outstanding taxes and debt such as small business financing before anything else. Once those responsibilities are taken care of, you can usually distribute the rest of the money to the members.
Before you do any of these things, though, check with your state laws to see if there’s an order to how funds from liquidated assets are treated. Typically, creditors must be paid first, including any taxes. You may not be cleared to dissolve the LLC until those taxes are taken care of.
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Step 5: Cancel Licenses, Permits, and Registrations
With your assets liquidated and creditors paid, you should be clear to cancel your business licenses and permits in all jurisdictions where you have them. If your LLC is registered in multiple states, you must complete separate dissolution paperwork for each one, usually as an application of withdrawal or a termination of registration.
At this point you can also close your business checking account and any other accounts held in the LLC’s name.
How Long Does It Take To Dissolve an LLC?
The length of time it takes to dissolve an LLC depends on the complexity of the business. It could take months if the members need to vote on the dissolution and liquidate assets. But a single-member LLC with minimal assets could complete the process within just a few weeks.
Your state’s dissolution process could also impact the timeline. It could take longer, for instance, if notarized signatures are required.
The Takeaway
Carefully navigate each step to dissolve your LLC to avoid any potential issues with state and federal tax authorities. If your LLC operates similarly to a sole proprietorship, you’ll have a more straightforward experience. With multiple members and complicated assets and financials, you’ll need more time to finalize the dissolution.
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FAQ
How much does it cost to dissolve an LLC?
The cost to dissolve an LLC depends on the states in which it’s registered. Each one may have its own fee for processing dissolution applications. You’ll also need to cover taxes and business debt.
What happens if you just abandon an LLC without dissolving it?
If you abandon your LLC without dissolving it, you’ll still have to meet the state’s registration requirements, including fees and annual reporting. Additionally, this keeps your LLC open to legal risk if someone chooses to sue your company.
Do I need a lawyer to dissolve an LLC?
No, a lawyer is not legally required to dissolve an LLC. However, you may prefer to use one if your situation is complicated – if you’re navigating multiple members or going through a bankruptcy, for example.
Can I dissolve an LLC with outstanding debt?
It’s possible to dissolve an LLC with outstanding debt, but you’ll want to understand your personal liability responsibilities. First, you must liquidate all of your business assets to put toward taxes and creditors. If any of your debt has a personal guarantee, you’re responsible for the balance regardless of what happens to the LLC itself. The same holds true for any outstanding tax balances, including payroll and sales tax. Additionally, creditors may still try to sue you for personal assets.
Does dissolving an LLC affect my personal credit?
Dissolving an LLC can affect your personal credit if you walk away with outstanding debt, especially tax balances and any financing that included a personal guarantee.
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