Learning how to dissolve an LLC correctly is essential for entrepreneurs wishing to close their businesses.
But it’s also helpful for aspiring LLC owners needing a contingency plan or those who intend to close their business after a specific time.
Either way, dissolving your LLC takes specific steps; you’ll find those in this post.
When you form an LLC, you file documents with your state, the IRS, and sometimes local municipalities that inform them you are open for business.
Until you say otherwise, the authorities will assume your LLC is active and expect you to file an annual report and pay taxes and other annual fees.
Dissolving your LLC removes that liability.
Dissolving your LLC also notifies creditors you cannot take on further loans and, when complete, allows you to stop ongoing fees relative to running your business, such as accountancy, insurance, utilities, etc.
And when closing your business because of a drop in sales or an economic downturn, the quicker you remove your LLC’s financial obligations, the better.
But to close your LLC, you must follow the formal procedure known as “dissolving and winding up” your business, which begins with dissolution.
Dissolution ends your LLCs official existence with the authorities, and how you dissolve it depends on why your LLC is closing.
The 3 reasons are administrative dissolution, voluntary dissolution, and judicial.
Here’s where a state’s Business Entity Administer removes the power and authority of an LLC because of failing to comply with specific state requirements, including:
Administrative dissolution can happen without your knowledge, meaning you might continue trading and suffer further consequences for doing business without a legal entity, such as no limited liability protection!
Avoid administrative dissolution at all costs by complying with state entity requirements. Fortunately, if it happens, an LLC’s owners can apply to reinstate their entity’s powers.
As the name suggests, voluntary dissolution is when LLC members choose to close their businesses.
To implement voluntary dissolution, LLC members (excluding single-member LLCs) must vote in favor and wind up the business by paying taxes and creditors, liquidating and distributing assets as per the LLC operating agreement.
Voluntary dissolution happens in 2 ways:
Business divorce happens, and when it does, judicial dissolution kicks in.
Judicial dissolution is when a court orders an LLC’s closure for various reasons, such as illegal activities, mismanagement, fraud, or failure to pay taxes.
But, more often, judicial dissolution happens because LLC members don’t or won’t agree to part ways or a disgruntled member wants to undo their business ties.
Judicial dissolution is challenging to get and requires more than members disagreeing on how to run their LLC. Instead, it requires proof that the LLC cannot continue relative to its operating agreement and state laws.
Closing an LLC takes specific steps that fall into 2 categories:
1. Dissolution: Involves filing Articles of Dissolution (or something similar) with your state and changes the LLC’s original reason for existence to that of winding up the business.
2. Winding up your LLC: After receiving dissolution approval, you must wind up your LLC by closing business operations, selling assets, paying creditors, and distributing what’s left to the owners.
Fortunately, most steps are easy enough; some you can do yourself, while others require an accountant.
Here’s how to close your LLC:
To voluntarily dissolve your LLC, members must vote to close the business.
LLCs with a dissolution procedure pre-written into their operating agreement follow that. In contrast, those without an operating agreement must follow their state’s LLC dissolution laws.
Once members vote in favor of dissolution, they record their decision and file it with their LLC’s official records.
Next comes tax:
Before filing the Articles of Dissolution, you must file a final tax return with your state’s Department of Revenue and the IRS.
To file a last return with your state, use the relevant website (often the Department of Revenue) and follow the instructions. IRS tax forms include a “Final Tax Return” box that you check, and there’s a “Closing Business Checklist” to help you with any additional filings. And LLCs with employees must also pay their final payroll taxes.
Depending on your state, you may need a tax clearance certificate from your state’s Department of Revenue before you can dissolve your LLC.
A tax clearance confirms you’ve:
You can’t cancel your FEIN, but you can close the account attached to inform the IRS you’re no longer in business and won’t file further tax returns.
You must file Articles of Dissolution with your Secretary of State’s office to close your LLC and avoid future liabilities and fees.
You can prepare Articles of Dissolution online using your state’s business filing website (usually the secretary of state). Fees and procedures vary between states; some require you to download and file the form by mail or in person.
Once your state approves, you can wind up your LLC.
Your windup responsibilities depend on your business type, size, and location. Still, the following are the most common steps when dissolving an LLC.
LLCs doing business in other states must file to withdraw their LLC’s approval to trade within each state to remove their tax and annual report liabilities.
The withdrawal form’s name varies depending on your state, including an application of withdrawal, certificate of termination of existence, termination of registration, or certificate of surrender of right to transact business.
When you dissolve an LLC, creditors have a specific time frame (90 to 180 days, depending on location) to claim outstanding debts.
When dissolving an LLC, most states require you to inform your creditors (such as lenders, service providers, insurance carriers, and suppliers) to allow them to register and claim outstanding debts.
Some states also require you to publish your LLC dissolution in a specific local newspaper to notify creditors of your intentions.
When an LLC closes, it often has debts, and we use our business assets to clear them; these can include:
After you sell your assets and clear your debts, you can divide anything left between the LLC members or, as per your operating agreement.
Before turning off your business lights, you must tidy up any loose ends to ensure a clean break that avoids future financial fees. These can include:
Regardless of the dissolution process, the EIN remains with the entity forever.
You can, however, cancel your IRS business account by sending a cancellation letter to the Internal Revenue Service, Cincinnati, OH 45999.
The exact steps to close an LLC depend on your location, and speaking with a local legal professional or accountant is advisable. However, most states require:
It depends on whether you plan to use it later and are okay with the administrative costs of maintaining an LLC.
For example:
To close a single-member LLC with the IRS, fill out and submit your LLC’s final federal tax return using the forms:
Check the “Final Return” box on the tax form and pay any tax you owe.
In a single-member LLC, yes. And it’s also possible in a multi-member LLC if one owner applies for a judicial dissolution.
But generally speaking, an LLCs operating agreement or articles of organization outline the voting majority required to dissolve an LLC. So, if an LLC has 3 members, at least 2 must agree to dissolve the LLC.
Check your state’s LLC dissolution laws for further information on this question.
I recently dissolved my LLC after 10 years in business; I won’t lie; it hurt.
My reasons were rising raw materials costs, increased competition, and an unlevel platform allowing false reviews.
While I don’t know your reason (I hope it’s positive), dissolving an LLC is sometimes unavoidable in our entrepreneurial journey.
But it doesn’t mean the end of the road; far from it because many success stories begin with failure; the difference is that those who succeed learn their lessons and never give up.
Common reasons are closing the business entirely, retirement or starting a new venture. It legally terminates the LLC’s existence.
Fees vary between states, whether you do it yourself or hire an attorney and local press publication costs. For example, dissolving an LLC in California is free, while others charge up to $100.
Yes, in most states, you can dissolve an LLC online using the state’s Department of Revenue website. However, others allow you to fill in the dissolution form but require you to mail it. Check your secretary of state’s or the Department of Revenue’s website for how to file your LLC dissolution.
It depends on the LLC; for example, you can vote to dissolve and file your dissolution papers in a day. But depending on your debts, assets, contracts, and lease agreements, winding up your LLC could take months.
You would need to complete the full dissolution process separately in each state the LLC is registered.
Yes, you need to file final tax returns. Any assets distributed to members may be taxable events.
Proper dissolution limits future liability but doesn’t absolve members of prior obligations.
The LLC must stop all normal business operations, collection of accounts receivable, contracting and sales before dissolving.
Yes, a dissolved LLC can apply for reinstatement within 2 years in most states by filing for restoration and paying fees.
Assets should be distributed to members according to ownership percentages stated in the LLC operating agreement.
Members may remain liable for predissolution obligations for up to 4 years per Georgia law.
LLC records should be retained for at least 6 years after dissolution per IRS requirements.
No, bankruptcy is different than dissolution. An LLC can file bankruptcy and continue operating as a business entity.
No, you must proactively cancel all business licenses, registrations and permits.
Yes, any fees related to dissolution (legal, accounting, state fees) are deductible business expenses.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos.
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