An LLC is a useful way to run your business, but you’ll have to dissolve an LLC company if it no longer fits your needs. Here, we’ll discuss everything you need to know about an LLC dissolution.
Closing the doors of your company forever can be an emotional process. While terminating a business, you may not have the same energy and excitement level as you had while starting your new venture.
However, no matter what, successful people always wrap things up properly so that nothing can hold onto them in their new endeavors.
Therefore, once you decide to dissolve your limited liability company (LLC) and move to the next phase of your career, you must follow the proper procedure to terminate your LLC.
Doing that will shield you from potential liabilities and secure your credibility. Once you dissolve your LLC in the right way, you can concentrate on the new challenges with undivided attention. This LLC dissolution online guide will help you get everything right as quickly as possible. So, let’s get started.
Importance of Dissolving an LLC through Proper Channel
When it comes to running a successful business, there are a lot of things you need to consider. The overall goal is to get maximum profit and avoid legal troubles as much as possible.
The same goes while terminating one (an LLC) or any other business structure. No one wants to deal with business issues that no longer exist. Therefore, formally dissolving an LLC online is important for the following reasons:
A) No More Obligations to Pay LLC Annual Fees and Taxes
As you already know, an LLC is a legal entity, and to be in good standing with the state, you need to go through some formalities from time to time. You need to file LLC annual fees, LLC annual/biennial reports, annual taxes, etc, to run your business in a state-compliant manner.
In case you no longer plan to operate your LLC, terminating an LLC while notifying the state and concerned authorities will put an end to all the formalities mentioned above.
If you do not terminate your LLC formally, you could be looking at thousands of bucks in accumulated taxes, fees, and penalties after a couple of years.
B) You Will Not be a Defaulter
Moreover, at the time of your LLC formation, you filed your article of organization with the state, got an Employer Identification Number (EIN), or filed other documents with the Internal Revenue Service, local taxing, and licensing authorities.
In other words, through these filings, you notified these authorities that your business is in operation. Unless you do not officially notify them about your business termination, by default, your business will be considered active, and you owe them all the fees and taxes.
If you do not pay these fees, you will be considered a defaulter with your business no longer in good standing with the state.
C) No Surprises With Lawsuits for Unpaid Debts
Going through a formal LLC dissolution process gives creditors notice that the LLC can no longer take on debts. So, in the future, there are no chances of lawsuits for unpaid debts, any other business liability, or a fee or fine from a government agency.
Types of an LLC Dissolution
Before digging deep into the LLC dissolution process, you should know that an LLC dissolution falls into the following three categories:
1. Judicial Dissolution
If a business fails to comply with state laws or cannot pay its taxes, the court can dissolve that business. The court also issues a judicial dissolution in response to a lawsuit brought by aggrieved LLC members who want to unravel their business ties.
2. Administrative Dissolution
If an LLC fails to comply with state law or does not file its annual report, it may face administrative dissolution.
In other words, if a business no longer remains in good standing with the state, the Secretary of State’s office imposes an administrative dissolution on that LLC.
In many states, in addition to the failure of maintaining good standing status, the Secretary of State can dissolve an LLC for nearly any reason that the Secretary deems fit.
3. Voluntary Dissolution
It occurs when LLC members willingly decide to close their company. This can happen in two cases:
Number 1: If LLC faces certain dissolution triggers such as the death of a member. Such situations are already written in the LLC operating agreement.
Number 2: LLC members cast a vote to dissolve the LLC at any time.
How to Dissolve an LLC in 5 Simple Steps
A company’s lifespan is not always a given. Many factors go into deciding when to close a business, not all of which are related to the failure. Many businesses start with a specific timeline in mind, and closure is an inevitable factor from the start.
Other companies address a specific need. When those requirements are met, the LLC is no longer necessary. So, whatever the reason may be, here are five simple and straightforward steps to formally dissolve your LLC.
Step 1: Vote to Dissolve the LLC
In the case of voluntary dissolution and multi-member LLC, the first thing you need to do is vote formally on the termination of your LLC. Most LLC operating agreements have the procedure for LLC dissolution, and you must follow it.
The best way is to hold a board meeting with all the members present. Generally, voting must be unanimous to dissolve an LLC unless stated otherwise in the operating agreement.
If the LLC dissolution process is not highlighted in the operating agreement, you should follow the procedure described in your state’s LLC statutes.
After the voting is done, you need to get it signed by all the members of your LLC. It is always recommended to keep a record of this vote as a resolution in LLC’s official records.
Step 2: Clear your Due Taxes and Notify Tax Authorities
In some states, before filing the LLC articles of dissolution, business owners are required to get verification of good standing or tax clearance from the state tax agency. So, if there are any outstanding fees or penalties due, make sure to pay them in full.
When filing your LLC’s tax returns, notify the agency that this will be your business’ final tax return. This will help you get a clearance from the tax agency in the form of a certificate or letter stating that you do not have any outstanding taxes.
Even if your state does not require a tax clearance certificate, getting one will protect you from the liability of unpaid payroll taxes.
Step 3: Settle Outstanding Debts & Notifying Creditors of Your LLC Dissolution
As a good business practice, you need to take care of your LLC’s remaining financial obligations by notifying creditors before dissolution. This will limit the possibility of late fees or litigation over unpaid obligations. Creditors include all of the following:
- Secured creditors
- Unsecured creditors
- Insurance carriers
- Service providers
For your LLC to be dissolved, some states require you to inform all your creditors about the dissolution before filing your article of dissolution with the state. In most states, notice is required by publishing a notice of dissolution in a local newspaper for several weeks.
You can also send individual letters to each creditor that carries an outstanding balance from your business. You can retain copies of these notices and letters as proof that you have brought your business to a formal end.
Depending on the state’s LLC statutes, the deadline for submitting claims vary. However, most states specify between 90 and 180 days from the date of the notice. Make sure your notice also states that any claims received after the deadline will be invalid.
Step 4: File Articles of Dissolution (by State)
Articles of dissolution is a legal documents through which you officially ask the state to dissolve your business. This form usually requires you to provide details about your company and its members, including your business name, EIN, and address, members’ names and addresses, along with their signatures on the document.
You may also be required to notify if and when your business assets have been distributed and any outstanding debts or liabilities. In most states, you can file a document with your Secretary of State’s office or the Department of Consumer Affairs.
The state-specific procedure and processing fee are given in the following table. Click on the state where your business operates to learn more about the state-specific LLC dissolution.
Select A State
Dissolve LLC Alaska
Dissolve LLC Arizona
Dissolve LLC Arkansas
Dissolve LLC California
Dissolve LLC Colorado
Dissolve LLC Connecticut
Dissolve LLC Delaware
Dissolve LLC Florida
Dissolve LLC Georgia
Dissolve LLC Hawaii
Dissolve LLC Idaho
Dissolve LLC Illinois
Dissolve LLC Iowa
Dissolve LLC Kansas
Dissolve LLC Kentucky
Dissolve LLC Louisiana
Dissolve LLC Maine
Dissolve LLC Maryland
Dissolve LLC Massachusetts
Dissolve LLC Michigan
Dissolve LLC Minnesota
Dissolve LLC Mississippi
Dissolve LLC Missouri
Dissolve LLC Montana
Dissolve LLC Nevada
Dissolve LLC New Hampshire
Dissolve LLC New Jersey
Dissolve LLC New Mexico
Dissolve LLC New York
Dissolve LLC North Carolina
Dissolve LLC North Dakota
Dissolve LLC Ohio
Dissolve LLC Oklahoma
Dissolve LLC Oregon
Dissolve LLC Pennsylvania
Dissolve LLC Rhode Island
Step 5: Distribute Business Assets
Once your LLC is dissolved, you need to handle all the business finances and complete outstanding tasks. When you have paid your taxes and creditors, any remaining assets can be distributed to the LLC’s members. Assets include physical properties, profits, and all financial investments.
Assets are generally distributed according to a member’s ownership percentage or according to its administrative role. All the details related to profit and asset distribution must be outlined clearly in the operating agreement to avoid any tension at the time of dissolution.
The dissolution of an LLC is a process that many founders are not prepared for. But, it is something you should be considering long before the time comes to dissolve your business. Many entrepreneurs don’t realize the need to plan ahead when they start their company with no idea of what may happen down the road.
Leaving loose ends like this can come back and hurt you in some way if you want to revive your company at any point later on. Moreover, letting state law handle your LLC dissolution completely may not be in your favor.
So, outline everything in the operating agreement beforehand. And when the time comes, make sure you formally dissolve your LLC instead of just abandoning it to avoid potential liabilities or other problems.
FAQs on an LLC Dissolution
Why would you dissolve an LLC instead?
The reasons for this are many, but you may dissolve an LLC if it is no longer needed. For example, many entrepreneurs choose to begin with an LLC to avoid personal liability. But, once the company is profitable, they may transfer it to a different structure like an S corporation or C corporation to make it easier to manage.
What are the Articles of Dissolution?
Articles of dissolution are the document filed with your state to dissolve your LLC. It is a more formal document than an application, and it will include the effective date. In most states, you must file a separate article of dissolution to dissolve your LLC each year.
Can I just let the LLC dissolve?
Just letting your LLC dissolve without formally dissolving it is not advisable as there are many legal implications. This can be very problematic if you ever decide to reactivate your company. It can create a messy ownership issue and may even make creditors think you’ve abandoned the business.
Is there any fee to dissolve an LLC?
Yes, you must pay a filing fee to handle the dissolution paperwork with your state. Many states charge $25 or less for this task, but some require a larger filing fee.
How much does it cost to dissolve an LLC?
On average, you must pay $25 to your secretary of state to handle the dissolution process. That fee varies depending on the state where your LLC was formed. Some states such as California do not charge any fee for processing a Certificate of Dissolution. But, you can expect to pay no more than $200 for an LLC dissolution in Delaware.
What are my payment options?
You can pay your LLC dissolution fee with a credit card, or you can mail in a check or money order. Most states accept all major credit cards including Visa, MasterCard, Discover, and American Express.
How long does it take to dissolve an LLC?
All the paperwork is processed immediately after you submit your application. Usually, this process takes about 5 – 7 business days. But, it all depends on your situation so the time varies based on that.
What happens after you dissolve an LLC?
After you dissolve an LLC, your LLC continues to exist for some time to complete a process called winding up. Resolve any lawsuit or liability faced by your LLC. You must pay all outstanding debts and taxes.
If there are any excess funds after this step, they must be distributed accordingly in proportion to each member’s percentage of ownership.
What happens if you don’t dissolve an LLC?
If you do not officially dissolve your LLC, you may face liabilities, lawsuits, and fines. For example, if you no longer conducting business with your Delaware LLC, it will accrue penalties and interest.
In Delaware, the LLC annual tax is $300. If this tax is not paid before the due date the penalty is $200 per year. Moreover, there is also a 1.5% monthly interest on the tax fee so it comes out to about $90 per year. If you let the LLC just sit, after 3 years, you will owe $1,770 to the state and your LLC will be revoked by the state.
The state has the right to collect this debt which you must pay. Now imagine if your creditors file a lawsuit against you. Dissolving an LLC through the proper channel will save you from all legal troubles and headaches.
Can you dissolve an LLC during a Lawsuit?
An LLC may defend and bring lawsuits during its winding up. The LLC ceases its operations and begins closing out its affairs during the winding-up process. Its activities include selling assets, paying creditors, handling litigation, and distributing remaining assets to LLC members.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.