An LLC (limited liability company) combines aspects of corporations and partnerships to create a unique business model. In an LLC, members don’t hold personal responsibility for business debts and lawsuits. But, just like any other type of business, LLCs must sometimes come to an end.
Whatever the reason for dissolving your LLC, the process involves formal steps that you need to follow. It’s important to dissolve your LLC properly to avoid further taxes and state fees. It also ensures that creditors are officially informed of the end of the LLC, allowing for claims to be settled and reducing your chance of getting sued from a remaining debt.
Follow these steps carefully to legally dissolve your LLC:
Step 1: Hold a vote with members to approve the dissolution.
When you’re dealing with an LLC, members give their approval for bringing the business to an end. This is in contrast to corporations, in which shareholders give approval. Members of an LLC can vote to end the company at any time. Some LLCs have a procedure for voting on dissolution, or you may follow the procedure outlined in the LLC statutes of your state.
Technically, dissolving an LLC doesn’t require a formal written resolution to dissolve. However, the most organized and effective way to dissolve an LLC is to officially document the dissolution in written form.
Step 2: Inform creditors and settle creditor’s claims.
After deciding to dissolve your LLC, inform your creditors of the decision and how they can make claims by mail. This includes a mailing address to send claims to, information to include in the claims, and the deadline for claims to be submitted. The LLC statues in your state will provide deadlines for submitting claims (it’s typically 90 to 180 days after the creditor is notified). The notice of dissolution from your LLC should note that late claims will be barred.
Once creditors have sent their claims, you may either accept or reject them. You’ll need to pay accepted claims, and creditors must be informed if their claim is rejected.
While it’s only required to inform creditors of the dissolution and resolve claims before filing dissolution paperwork in some states, doing so is a good idea. Not only will it help you maintain positive relationships with your creditors, but it will also help you avoid late fees and legal action against you from unpaid debts.
Step 3: File Articles of Dissolution or a Certificate of Dissolution with your state.
Once the choice has been made to dissolve an LLC, you must file the required paperwork in your state. If the LLC conducted business in multiple states, you’ll have to file documents to dissolve the business in those states as well. The paperwork, fees, and filing process may change depending on the state.
Note that you may not be able to file dissolution paperwork with your state until back taxes owed by the LLC are paid in full.
Step 4: File a final tax return with the IRS and your state agency.
You need to officially end your LLC to the IRS and you state tax agency in order to avoid any further tax obligations. On federal tax forms, you’ll see that there’s a “Final Tax Return” checkbox, which you’ll check to indicate the closing of your business. Once you’ve completed a final tax return, you’ll need to pay any remaining owed taxes in full.
If your LLC has employees, you’ll also need to pay final payroll taxes. Otherwise, the IRS may seek restitution.
Step 5: Cancel business licenses, contracts, and leases.
To fully dissolve an LLC, it’s important to terminate all licenses, contracts, and leases associated with the business. If you own a storefront or other physical property for the business, you’ll need to contact the property owner to terminate a lease if it ends after the date of dissolution. Also, if you have business licenses or permits, you’ll need to contact the city or state in which you applied for the license or permit to cancel it.
Step 6: Distribute remaining assets to members.
Once all creditors claims have been paid, the remaining business assets must be distributed to the LLC members. Profits, financial investments, and physical property make up the assets of your LLC. Assets are distributed according to share of ownership by percentage, and you must report distributions to the IRS.
Step 7: Notify employees and clients.
When you dissolve your LLC, you should make sure to conclude business relationships amicably. This is even more important if you plan to continue working within the same industry. Inform your employees and clients of the decision in a professional manner once the decision has been made official.
Ending a business can be a trying process. But, you can minimize stress and complications by following the official procedure for LLC dissolution, as detailed above.