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How to Handle the Dissolution of an LLC

Although a dissolution of an entity, or closing it down in simple terms, is never something that people plan on doing when they open up a business, it does not mean that it does not happen. Also, it does not have to mean that the business is closing. In fact, a dissolution of an entity could simply be the result of wanting to change how the company is set up. More often than not, though, it is a process to close a business down; so when this happens, you need to take special care.

If and when the time comes that you need to handle a dissolution of an entity, make sure that you do it in the right way so that you and your business are protected throughout the process. The way that you will dissolve an entity really depends on the type of entity that you have. In the same way that you took the time to make sure that you set up your business entity correctly by filing the relevant documents, additionally—if you have decided to close the business down—you will need to take the proper steps to make sure that you do everything correctly and by law.

The Most Common Benefits to Dissolving a Business

There are times when it is ideal to close a business. If this is the case for you, then you may be wondering why you need to go through these extra steps to close it down. However, there are some real benefits to going through these steps and why you should follow the process.

Until you tell the IRS, the state, and licensing authorities (if applicable) that you are going out of business, they will assume that you are still operating. With this also comes some responsibility that you do not want to be liable for after you have ceased operations. This can include your annual filing reports, minimum taxes, and even annual fees. If you are no longer in operation, you do not, and should not, want to pay these fees. When you dissolve an entity the proper way, you put an end to any taxes, state fees, or any other legal requirements that you would otherwise have if the business was still in operation. You also can tell your creditors with a notice that your business entity can no longer take on any debts. Another benefit of going through the formal process is that you will be less likely to be surprised with a potential lawsuit, unpaid debt, or fine from a government agency.

Why You Should Not Let It Linger

It can be very hard to decide to close your LLC, but once you do, do not let it remain open in the eyes of the law for too long. This can cause you a lot of heartache over time if you do not take care of the essential item of dissolving it legally sooner rather than later.

Letting the LLC remain open can result in the following obligations:

  • Additional financial obligations to the business
  • Potential litigation matters
  • Other reporting requirements for the state

By taking care of the dissolution, you can avoid these types of obligations and make sure that you do not run the risk of forgetting to take care of those additional requirements once you have closed the business down and put the LLC behind you. It can continue to haunt you over time if you do not take care of it properly. For example, you may find that since your LLC is still established, anyone can bring a lawsuit against it or you even though you are not currently in business at the time. Avoid all of this by dissolving your LLC.

Dissolving an LLC

If you have an LLC that you would like to dissolve, there are some specific steps to take in the process. Follow these steps and you will have your dissolution completed in no time at all.

Step 1: Follow the LLC's Internal Procedures

With an LLC, there can be one or more members. If there is more than one, you must make sure that you approve this action as set forth in your internal procedures. These would have been decided upon when you formed the LLC. How you should handle this can depend on whether or not you included a voting procedure, or another kind of procedure, in your LLC operating agreement.

If you have guidelines for voting for a dissolution, you must follow those guidelines. If you have not created a guideline for this, follow the procedure for LLC dissolution that is outlined in your state laws. Every state is different, so check your local state guidelines to be sure that you are following them correctly. After you have taken the vote, you should outline this vote in your resolution so you have a written record. While it is not a requirement to keep a resolution on file, it is highly recommended. This written decision should be kept in the official records of the LLC.

Step 2: Notify Any Creditors of the Dissolution

If the vote is in agreement for the dissolution, the next step to take is actually notifying any creditors that you will be closing the business. As part of this notification, you should also tell creditors how to submit the claims and the deadline that you will need to have these claims submitted for payment. The deadline for getting these claims is something that is dictated by the statutes set forth by the state for LLCs. Generally, it is somewhere between 90 and 180 days from the day you give notice to them, but you should check with your state laws to be sure. Your notice should also state that any claims received after the outlined date will be barred.

When you should supply these notices is something that you need to check with your state. Some states require that this be done before you actually file dissolution papers. While not all states will require you to notify any creditors, it is good business practice. It is something that will also benefit you in the long run because it can help you to take care of any of the remaining financial obligations of the LLC before it is dissolved. Not only does this provide you with some peace of mind, but it also limits the possibility of getting late fees tacked on or any potential lawsuits for not paying any financial obligations.

Step 3: Notify the Tax and License Authorities

While you are notifying everyone else, you also need to take some time to notify your local and state tax authorities. This should be done in order to determine if your LLC currently owes any taxes before you officially dissolve it. You can pay these and move on to notifying any agencies that provided you with licenses to operate your business. Every business is different, so you should make sure that you notify the agencies that you have done business with. When you contact them, you should cancel the licenses and pay any outstanding fees so you can completely close your account with them. After you have paid all outstanding fees and any outstanding financial obligations, you can take the remaining assets and distribute them to the LLC members evenly or as outlined in the business plan for the LLC.

Step 4: File Dissolution Papers

Just like you filed the proper paperwork to form your LLC, you will need to file the proper paperwork to dissolve it. It is a process, and you will need to make sure that you follow all of the instructions that are given to you at the government office. Before you go to file, check with your state office to make sure you have everything in place. One of the more required items that you will need to file is an article of dissolution. Some states have their own form of this document, so make sure that you provide the right one. If they do not provide their form to you, you can use a standard article of dissolution in its place.

Once you have filled out the form or forms, you can then officially file them. Where you file these is typically the same place or state agency where you filed your original LLC formation documents. That should be the first place you check; if you cannot file it there, you should go to the Secretary of State to make the filing. In order to file you may have to pay a fee, which can vary from state to state. Check with your local agency to see what you may need to pay, the specific filing procedure, and the forms you will need.

An additional step you may need to take to file in some states is getting the certification from the state taxing agency to confirm that the LLC is current on all of the state taxes and other financial obligations. This is not a requirement in all states, but where it is, the previous two steps do come in handy here to make the process faster. If you do need to provide this certification, you will need to file it along with your dissolution papers.

Other Additional Steps You May Need to Take

If your LLC was foreign registered in additional states, you will need to go through the process in all of the states to make sure that you close it there. The idea here is that you will need to let them know that your LLC can no longer do business in that state and you want to submit a new filing of dissolution. As mentioned before, this causes a huge risk to you if you do not go through this process. You could remain liable for taxes even though your LLC is no longer in operation, you may have to provide annual reports, and much more. All of this is true even if you have not done any business in that state during that year. You will even have to pay minimum taxes for that state. If you do have the LLC registered in another state, make sure that you go through the steps to cancel that filing in those states. Completing this in one state is not enough to make sure that everyone knows the LLC is dissolved.

Lastly, even once you have the LLC dissolved in all states, if applicable, you will still be responsible for two more tasks: the final income state tax return and final employment tax returns. Depending on when you close your business, more often than not you will still need to do these two tasks because you likely had some form of income during the year leading up to the dissolution of the LLC. To make sure that you do everything that is required of you, this checklist of tax-related actions from the IRS can help guide you along the way.

It is not an easy decision to close an LLC. In fact, for many people it is a very difficult one. People do not start a business to watch it fail. You likely started your business so you could watch it thrive over time. However sad it is, you still need to make sure you handle the dissolution the right way so that the LLC does not continue to haunt you even after you close the doors. By dissolving the LLC the right way, you actually minimize any potential fees, legal fees and lawsuits, and any other state and local obligations you may have.