When it’s time to close the doors on your business — permanently — you need to do it the right way. That means more than ending your vending and utility contracts, saying farewell to your employees, and locking up one final time.
You have to officially close your business in the eyes of the secretary of state. In the case of a limited liability company (LLC), this process is known as dissolution.
What Does It Mean to Dissolve an LLC?
Simply put, dissolving an LLC means ending the business as a legally recognized entity. Dissolving the LLC is part of the process of terminating a business. Once an LLC has been dissolved by filing a form with the state, its owners still have to wind up its operations and pay out debts to creditors and remaining assets to shareholders.
Types of LLC Dissolution
- Voluntary dissolution
- Administrative dissolution
- Judicial dissolution
The type of dissolution we will be talking about in this article is called voluntary dissolution. As you can probably guess, any instance in which the LLC’s members choose to close the company is considered voluntary dissolution.
When you voluntarily decide to shut down your LLC, you need to take action to dissolve the company. You must file a form with the state, complete a final tax return, and finalize other outstanding obligations to employees, creditors, and your fellow members.
Administrative and judicial dissolutions are, at least to some degree, out of your hands. In these cases, another party other than the members who own the LLC decides to close the company.
In administrative LLC dissolutions, the secretary of state orders the dissolution due to a failure of the business to comply with regulations. Some of the issues that can lead to administrative dissolution include:
- Neglecting to file your annual reports, if required to do so
- Not having a registered agent who meets the criteria established in your state
- Failing to pay franchise taxes or fees
In certain states, you have to dissolve your LLC if a member dies or declares bankruptcy. That’s not the case in most jurisdictions, but business owners should be aware of any such laws and determine what their next steps would be if such an event happened.
Often, the administrative dissolution process includes formal notice and a grace period during which the LLC’s members could bring the company into compliance. It’s possible to reinstate an LLC that has been dissolved, but the company must address all issues of noncompliance and file an application for reinstatement.
Judicial LLC dissolution is imposed by a court, usually as a result of disagreements between members of an LLC.
Taking a dispute to court to dissolve the company is the last resort if efforts to amicably resolve the disagreement fail. A court is more likely to impose judicial dissolution of the LLC if the member bringing the case can demonstrate that the LLC is not adhering to its operating agreement.
To reduce the risks of judicial dissolution of your LLC, it’s important to do the following:
- Be cautious about who you go into business with
- Craft a specific and well-thought-out operating agreement
- Make every effort to handle disputes and disagreements before they proceed to court
Steps to Dissolving an LLC
1. Check Your Operating Agreement
The first thing you should do when deciding to dissolve your limited liability company is look at your operating agreement. An LLC operating agreement should outline how and when the business can be dissolved and what obligations the company has upon dissolution.
If your operating agreement is unclear, it may be a good time to seek professional legal advice about your next steps.
2. Have Members Vote to Dissolve the Business
In many cases, a member vote on a resolution to dissolve the company is what begins the process of dissolving a business entity. The LLC’s operating agreement should specify what percentage of shareholders need to vote to close the company for the resolution to pass.
Some LLC operating agreements may require a unanimous vote, while others require only a majority. The vote on any resolution to dissolve an LLC should be held as a formal meeting with advance notice given to members and its results recorded.
3. File a Certificate of Dissolution
Once the necessary number of members vote to dissolve the LLC, you must file articles of dissolution with the secretary of state. You started your LLC by filing documents called the articles of organization, and now you will end it by filing the articles of dissolution.
In many states, LLC members have the option to file the articles of dissolution online or by mail. Before you start working on your articles of dissolution, you should gather your information, including the legal name of your company, the date dissolution will take effect, and a statement of shareholders’ approval.
4. Close Your Business With the IRS
Dissolving an LLC with the appropriate state agency is a big step in terminating a business, but you’re not done just yet. The next step in the process is to close your company with the Internal Revenue Service (IRS) to wrap up your tax obligations.
Dissolved LLCs must file their final tax returns and pay outstanding federal tax bills. You will also have to close the business account linked to your employer identification number (EIN) with the IRS.
5. Resolving Debts and Distributing Assets
Your business may not be a business any longer, but you still have to meet its obligations. Mail your employees’ final checks in a timely manner and pay any outstanding employment tax.
By law, companies are required to notify any creditors that they have filed for dissolution and work to pay off the company’s debts. Closed companies often need to liquidate, or sell off, their assets.
Once any remaining debts have been paid, the assets left over should be distributed among LLC members. Typically, the division of money is based on each member’s percentage of ownership in the company.
Once the legal form has been filed, the taxes have been paid, the IRS has been notified, and all debts and remaining assets have been dealt with, the business officially comes to an end.
Getting Help With Dissolving an LLC
The process of filing the paperwork needed to dissolve an LLC isn’t too complicated. However, sometimes you may prefer to pay a professional to do this for you.
Maybe you simply need to free up your time to use for something else, like starting a new job or a new business venture or taking care of family members. Perhaps closing your business is a painful subject and having someone else handle the technicalities is best for your mental well-being. Whatever the case, there are professional services that will file your paperwork for you.
An example is LegalZoom, an online legal technology company. Just provide your information by filling out a simple questionnaire, and LegalZoom will draft up the form for you and file it with the secretary of state.
How Much Does It Cost to Dissolve an LLC?
If you file the documents to dissolve your LLC on your own, you only have to pay a state filing fee to submit your dissolution paperwork. These fees can range from just a few dollars to a few hundred dollars. Some states charge no fees for filing a document dissolving an LLC.
If you pay a professional service to file your paperwork, you will have to pay an extra charge on top of the state filing fees. These charges, too, can vary.
Of course, you also have to pay your debts, your employees’ final paychecks, and your final tax returns.
What Happens If You Don’t Dissolve an LLC?
If you stop doing business without dissolving your LLC, it could cost you a lot of money. Many states charge annual franchise taxes, which can apply whether or not you actually collect any revenue. You might also get hit with fees for failing to file annual reports.
Dissolving your LLC isn’t a decision you have made lightly. When it has to be done, though, you want to know that you’ve given your business a proper sendoff and tied up all of the loose ends.
As the saying goes, when one door closes, another one opens. Whether you’re ending your business to enjoy retirement, shift careers, pursue a new venture, or spend more time with your family, the ways in which you grew personally and professionally from your entrepreneurship journey will always stay with you.