Ensuring that you properly dissolve your LLC is just as important as proper formation. Following the correct steps will allow you to move forward from the business with protection against liabilities incurred by the LLC.
Formal vs. Informal Dissolution
Formally dissolving an LLC includes filing the correct paperwork with the appropriate state agencies expressing an intent to dissolve your business. By sending a notice to the state, no more fees, taxes, or annual reports will be required of the entity from that point. This process also includes providing notice to creditors that your business is closing and, therefore, cannot accrue any further liabilities.
Another less formal way of ending your business entity is by not paying the required annual fees and state taxes. When your LLC is deemed overdue for a sum to the state, your business’s status becomes inactive. Going this route may leave you open to legal actions by the government and creditors seeking to recover unpaid taxes and debts, so be sure to get legal advice before going this route.
The Process of Dissolving an LLC
The first step in the LLC dissolution process is to review state laws and the LLC operating agreement for the dissolution process and adhere to these formalities. There must be a vote among the LLC members to officially instigate dissolution. If there is no operating agreement, your state likely has its own default procedures that need to be followed. As with all actions taken within the company, you should take accurate notes regarding the vote to dissolve, as well as the procedure followed.
After a decision has been reached, you will need to notify your state government of your business’s dissolution. This is done by filing the appropriate dissolution forms required by your state. The correct dissolution form can usually be located on the website for your secretary of state. The forms are often referred to as a certificate of dissolution, certificate of cancellation, certificate of termination, or articles of dissolution. The cost to dissolve is usually a nominal filing fee and normally only takes a few business days to process. A Tax Clearance Certificate also needs to be filed in a handful fo states, to be sure there aren’t any outstanding taxes or annual reports due.
Next, you will need to notify the creditors of your business of the dissolution and inform them of the method by which they can submit claims for payment. The deadline for creditors to submit claims will vary by state. If a claim by a creditor is accepted by the LLC, then you can either pay the full amount or arrange to pay a percentage of the claim to the creditor. For example, depending on the remaining assets of the LLC, you could potentially negotiate a payment of 80% of the claim amount rather than the full payment of 100%.
Creditors of the LLC may include:
- Vendors and suppliers
- Financial institutions
- Professional insurance providers
Once the liabilities to the government and creditors have been satisfied, the next task will be to distribute the remaining LLC assets to its members. Assets of the LLC must be distributed proportionately according to the ownership interest of each LLC member unless otherwise stipulated in the operating agreement.
The following are considered business assets:
- Real estate or other tangible property
- Stock or other financial investments
You will need to notify local and state taxing authorities that you are going out of business so they can determine if there is an outstanding tax liability for your Limited Liability Company. Some states require that you request “tax clearance” before formally dissolving the company. This tax clearance is a document from your state that officially consents to dissolution and certifies that your entity is in good standing with the state’s taxing authority.
At the federal level, you will need to file the final tax returns for the LLC and final quarterly employment tax return. If the LLC is taxed as a corporation, the final Form 1120 or 1120S (if taxed as an S-Corp) will need to be filed. If the LLC is taxed as a partnership, the appropriate form is Form 1065. If you never made any corporate elections and your LLC is treated as a sole proprietorship, you will need to file a Schedule D on your personal income tax return. On whichever form is used, the final profit and loss of the company must be reported, and you must indicate that the LLC is closing.
In addition to indicating dissolution on the final company tax return, the distribution and sale of any LLC assets must be reported to the IRS. You must report that your LLC will be dissolving and liquidating assets by submitting the appropriate form.
So what will happen to your Federal Employer Identification Number (EIN) once your business closes?
Once an EIN has been assigned by the IRS, it cannot be canceled, and it cannot be reassigned to any other entity. That number will remain associated with your LLC and can be used later if needed.
Additionally, any business licenses, assumed business names, leases, contracts, etc. should all be formally canceled.
Dissolving an LLC should be done after consulting with a law firm and CPA in order to make sure it was done correctly and to avoid costly errors.
Properly Closing Your Business with the IRS: https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business-checklist