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When an LLC – Limited Liability Company – goes out of business, whether voluntarily or involuntarily, the company undergoes a dissolution process.
Dissolution is more than putting out a closed sign and no longer accepting customers. For an LLC business entity to be fully dissolved, it must file articles of dissolution with the state of operation. Failure to file dissolution papers can result in a business staying formed.
We’re going to explain the process of how to dissolve an LLC officially and legally. We’ll look at the different types of dissolution and any crucial factors you must know.
Once a company forms an LLC or corporation, it must file for dissolution to fully be out of operation. This process must happen in the LLC’s state of operation and any additional states where you conduct business. There are multiple things to do to dissolve your company fully.
The document required to dissolve an LLC are articles of dissolution. These documents may sometimes be referred to as a certificate of cancelation or a certificate of dissolution.
This form must be submitted to the Secretary of State as a notification of closure. If your LLC operates in multiple states, you must file articles of dissolution with each state’s Secretary to fully dissolve your business.
The company must also file a final tax return with the IRS and the state agency if required. There is a box to check labeled “Final Tax Return” on all federal tax forms.
You may also want to check the IRS’s Closing Business Checklist. This list provides information for any additional filings your LLC must submit.
For LLCs that have employees, it’s crucial to ensure all final payroll taxes are paid. Failure to do so can result in the IRS seeking restitution from LLC members’ personal assets and people who signed the payroll taxes.
LLCs with an assigned FEIN – Federal Employer Identification Number – should also notify the IRS that the business is no longer in operation and will not file future taxes.
FEINs cannot be canceled, but the account connected to the EIN can.
In addition to the above steps and the IRS checklist that we recommended on how to dissolve an LLC, there may also be a few other things LLC members must do to dissolve their company.
It’s a good idea to remember to cancel any business licenses so you don’t incur unnecessary renewal fees. You may also want to cancel any website domains, advertising, and close all business accounts and leases.
Companies also have to settle any outstanding debts, void contracts, and release employees. By law, you must give notice to creditors of the company’s closure. In some states, this process may have to be done by a public notice published in a local newspaper.
And finally, it’s good business manners to contact your current customers to inform them of your business’s upcoming closing, so they have time to arrange for a suitable replacement.
Once you’ve completed every step to fully and legally dissolve an LLC, the company’s assets must be distributed to all of the LLC’s members or shareholders.
In most cases, the assets are split according to the ownership percentage. The majority of LLCs outline asset distribution in the operating agreement they created upon startup.
Assets divided among the members include any profits, financial investments, and physical properties the LLC owns.
Different types of dissolution can occur to cause an LLC to close permanently. Some LLC members may voluntarily decide to disband the company. Other companies do not want to shut their doors but have fallen into too much legal trouble and have been ordered to do so by legal authorities.
In some cases, LLC members may decide to dissolve their company voluntarily. In this case, the members have chosen to close the business on their own terms. Voluntary dissolution can occur in one of two ways.
One option is when there are terms written into the operating agreement that outline possible dissolution reasons, such as a member’s death or retirement. Another option is for members to vote for the company’s dissolution.
If a company dissolves due to judicial dissolution, it’s doing so under a court’s order. Courts have the authority to dissolve an LLC if the company fails to pay taxes or fails to comply with the state’s laws.
A more common reason a company goes through judicial dissolution is a lawsuit filed by an LLC member who no longer wants to have ties to the company. The other LLC members may be against the separation and unwilling to resolve the dispute peacefully.
Companies that go through administrative dissolution do so under the order of the Secretary of State’s office. This dissolution generally occurs due to a company’s neglect in complying with the law or failing to file annual reports.
However, since the Secretary of State has a broad range of powers, there could be various reasons why the company gets dissolved outside of their control.
Still wondering how to dissolve an LLC? Here are a couple of frequently asked questions people have about dissolving an LLC.
Articles of dissolution are paperwork that an LLC must submit to the Secretary of State to be officially closed.
Administrative dissolution occurs from an official order by the Secretary of State. This type of dissolution is an involuntary closing of a company due to failings defined by the Secretary’s office.
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