How to Dissolve an LLC?

ByI. Mitic
September 22, 2021

Closing an LLC doesn’t necessarily mean that one has failed. Many form companies with a specific venture or timeline in mind, and once those are concluded, they no longer need to keep the business open.

But while closing their business, many tend to worry about how to dissolve an LLC properly since costs and procedures differ from state to state. Luckily, the most important parts of the process are essentially the same wherever your business is based.

Types of LLC Dissolutions

There are three types of dissolutions you should be aware of:

Judicial dissolution is a process through which the courts order the termination of a business entity. This type of dissolution can result from an LLC’s failure to comply with state laws or to pay its taxes. However, dissatisfied LLC members can also file a lawsuit and demand that the LLC be dissolved.Administrative dissolution is an action taken by the Secretary of State. The three most common reasons for LLCs getting dissolved administratively include not paying franchise taxes, failing to file annual reports, and not maintaining a registered agent.

Keep in mind that although these might be the most prevailing grounds for LLC closures, the Secretary of State has the authority to dissolve an LLC for any reason he sees fit.

Voluntary dissolution is a self-imposed dissolution and the main subject of our guide. Members can vote to dissolve an LLC at any time. Additionally, dissolution triggers can be added to the LLC’s operating agreement, including the death, departure, or bankruptcy of one of the members.

Should You Close Your Business?

Whether or not you should close your business is a tough decision to make. It’s one thing to close it when you set up an LLC to address a specific need and have no more use for the company. But it’s a whole other story if you actually had long-term plans that didn’t pan out.

Sometimes dissolving an LLC is necessary even if initially everything seemed perfect – you came up with a great idea and had plenty of motivation and persistence.

Unfortunately, that’s not always enough. You could run out of money, a key member could become disinterested, or your product could simply not be in very high demand.

In such situations, many prefer to cut their losses and walk away. Others continue to hope that somewhere along the line, the circumstances will improve and that “pausing” their business for a time might help. However, the longer you delay closing an LLC, the higher your costs.

States have no way of knowing that you’ve stopped conducting business permanently or otherwise, which is why they will keep billing you until you officially notify them. Seeing as debt doesn’t just disappear after you shut your company’s doors, you need to inform all relevant authorities about your decision.

If you’re unsure about what the best course of action is, you can take advantage of the free consultations that most of the LLC assistance services offer.

How to Dissolve an LLC: A Step by Step Explanation

We’ve compiled a list to help you keep track of all the obligations that you must fulfill in order to close your business.

1. Agree to Dissolve

To begin the dissolution process, you must hold a vote first. Depending on the state, you may need every member, the majority, or two-thirds of the members to agree on this proposal.

Make sure your operating agreement covers LLC dissolution procedures, which are often quite useful. Of course, if you’re a sole member of an LLC, you should just disregard this step and move on to the next one.

2. Notify Creditors and the Appropriate Authorities

It might be one of the more aggravating tasks, but it’s one you must complete nonetheless. You must notify your creditors about your decision to dissolve your business and give them a deadline to submit claims and lawsuits.

The deadline should be specified in your LLC dissolution notice, and it should be in accordance with the regulations of the state in which your LLC is registered.

Certain businesses require specific permits to operate. If you fall into that category, you also need to contact the appropriate authorities to cancel those licenses and pay any outstanding fees.

3. File the Official Paperwork

In most cases, you’ll need to file articles of dissolution with the Secretary of State to dissolve your business. Before you start scouring the internet for those forms, check to see if your state has a different name for them or if you’re obligated to submit any additional documents.

Furthermore, be prepared to pay the LLC termination fees, which are, again, determined by each individual state.

If your LLC is registered in multiple states, you’ll have to file documents with all of them individually.

4. Take Care of the Finances

You must settle any debts that the LLC has, and it’s advisable to prepare for obligations that your creditors are yet to inform you of. Not to mention that you should collect outstanding payments from your customers and let your vendors know that you’ll no longer be needing their services.

5. File a Tax Return

To terminate an LLC completely, you’ll need to file a final tax return with both the state and the IRS. If you have employees, you’ll also have to pay the final payroll taxes. Seeing as an LLC can be classified as several different business entities for tax purposes, you have to be careful about finding the documents that are appropriate for your company.

6. Divide It All Up

The very last step in closing a business involves dividing all of its assets among its members. This can be done by distributing everything equally or, as is more common with larger LLCs, according to the specifications laid down in the operating agreement.

Final Advice

Our guide on how to dissolve an LLC can be helpful to anyone trying to close their business. All you have to do is follow these steps meticulously and remember to keep your business records for at least seven years so as to avoid any future troubles.

We know that the entire process can take time but try to be patient, and if you run into any overly complicated bureaucratic issues, don’t hesitate to consult legal professionals.

FAQ
Can one member dissolve an LLC? +

It’s possible for one member to close an LLC if the company consists of two members. However, percentages of ownership also play a role in the matter, and the more members an LLC has, the more complicated it gets.

You’ll have to study your state’s laws carefully in order to determine which of them apply to your specific situation.

Can you put an LLC on hold? +

“Pausing” or putting an LLC on hold is not possible. Even if you stop doing business, the LLC will continue to accumulate debt and taxes. Dissolving an LLC and then forming a new one later on is a better option.

Can my LLC affect my personal credit? +

Your personal finances and those of your LLC should be completely separate. Therefore, your LLC shouldn’t be able to affect your personal credit in any way.

That being said, there are some exceptions to the rule. For instance, if you agree to be personally liable for your LLC’s loans, it will appear on your credit report.

What happens if you don’t dissolve an LLC? +

If you fail to close your business or to do so properly, you’ll be held personally responsible for the debt and taxes that accumulate. Read our guide on how to dissolve an LLC in order to avoid such a scenario.

 
About author

For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.

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