How to Dissolve an LLC Properly & Avoid Legal Issues

LLCs can be closed for different reasons. You may choose to dissolve an LLC if it faces financial challenges, you’re retiring, or its members are involved in disputes. However, you can’t just stop operating and walk away.

LLC dissolution is a formal process that takes time and requires compliance. Without it, you may incur penalties, face continuous tax obligations, or be held liable for business debts. Today, we share the steps you should take when closing an LLC.

Key Takeaways

• Once you’ve decided to dissolve an LLC, you can start the process immediately or, for multi-member LLCs, conduct a formal vote.
• As you wind down your operations, be sure to inform creditors, business partners, vendors, and employees of your LLC’s closure.
• LLCs undergoing dissolution must file their final tax returns and notify licensing authorities about their closure.
• For a state to declare an LLC as officially dissolved, it must review and approve the company’s dissolution filing.
• Business bank accounts should be closed and all remaining business assets should be distributed upon an LLC’s dissolution.

Seek Member Approval & Votes

To dissolve an LLC, you must make a decision. Single-member LLCs can choose to close or not, while multi-member LLCs need member approval for dissolution.

Once a multi-member LLC decides to close, it should conduct formal voting according to what’s stated in its operating agreement. Dissolution may require a simple majority, supermajority, or unanimous vote, and the result must be documented. Record all important information about the vote, including:

• When the process was conducted
• Who participated in the vote
• How many votes the LLC received
• When the company is set to close

Your voting document shows that the dissolution was approved and helps protect members from potential business liabilities. Keep these records with your LLC’s important documents, as you may need them for tax purposes or legal proceedings.

If you haven’t created an operating agreement, you must follow your state’s current laws when closing your LLC. These regulations should be listed on the official website of your Secretary of State or equivalent filing office.

Start Winding Down Your Operations

After your LLC’s dissolution has been approved by its members, you can wind down business operations. Start the process by sending an official dissolution notice to creditors. It should state that you’re closing the business and discuss how outstanding claims should be submitted.

Creditors are allowed to file claims within 90 to 180 days from when you sent your dissolution notice. Otherwise, your LLC shouldn’t accept new claims. In most states, you’re required to notify all of your creditors before filing for business dissolution with the Secretary of State.

Additionally, you must:

• Cancel vendor contracts.
• Inform your business partners and customers about your decision to close the business.
• Give employees advance notice of termination. (You may also need to provide them with severance pay.)
• List all of your LLC’s assets, including equipment, inventory, intellectual property, and financial amounts, for settling debts and distributing assets.
• Determine and record the fair market value of significant assets. You’ll need this information for final tax filings and member distributions.

Fulfill Your Tax Obligations

You should also manage your LLC’s taxes before its closure. Ask federal, state, and local tax authorities if you owe them any taxes. For unpaid state taxes, make the necessary payments to your state tax department. This will allow you to obtain a consent to dissolution notice, a tax clearance certificate, or similar document.

Also, make sure to file your LLC’s specific tax returns and declare that they’ll be the last returns submitted by your business. These forms should have check boxes or other ways to declare that they’re filed as your final tax returns. Include all income and expenses incurred through the date of dissolution, and ensure all required forms are complete.

If your LLC has employees, you’ll need to file all required payroll tax returns, submit final wage reports, and settle all outstanding payroll tax obligations to the IRS and your state tax department.

Learn About Tax Resolution from NCH

Inform Licensing Authorities About Your Dissolution

This step applies to LLCs with professional licenses or business permits.

Before closing your business, notify the state and federal agencies that issued your business licenses and permits. Set some time to complete the process and submit any required documents. Also, determine whether you’ve incurred unpaid fees, then settle them.

File Dissolution Documents with Your State

LLCs that choose to dissolve are required to file articles of dissolution or a certificate of termination with their Secretary of State. The document declares that you’ve decided to close your business.

All 50 states have varying requirements, fees, and processing times for filing dissolution documents. For instance, you may be asked to submit a tax clearance certificate with your articles of dissolution. The form may also require specific information and signatures of authorized representatives. Your Secretary of State should be able to explain their requirements to you.

How Are Dissolution Documents Processed?

After receiving your dissolution documents, the state will review and approve your filing if everything is in order. Your LLC will then be considered closed and listed as “terminated” in public records.

Processing times vary by state, ranging from a few days to several weeks. If you file for dissolution online, your Secretary of State will process the filing immediately. Plus, some states offer expedited processing for an additional fee.

Compliance Update

The Nevada Secretary of State charges $100 for filing dissolution documents for domestic and foreign LLCs. 24-hour processing for these filings cost $125.

Close the LLC’s Bank Accounts

The next step in an LLC’s dissolution process is closing all of its business bank accounts. Do this if your venture has settled all of its incurred debts and liabilities. Other important steps may include stopping automatic payments from company credit or debit cards or withdrawals from business checking accounts.

When closing a business bank account, expect to submit documents such as:

• Your LLC’s dissolution papers
• A request letter for the account’s closure
• An authorization letter from a designated owner or manager

Distribute All Remaining Assets

Finally, make sure to distribute all remaining assets to your LLC’s members. The company’s operating agreement should be followed during the process.

You can distribute assets to members according to their ownership interest or a specific arrangement outlined in the operating agreement. Document all distributions made to members, including the assets that were given, their market value, and the date of distribution.

Moreover, state laws may apply to LLC asset distribution. Check your state’s legal requirements and consult an attorney, accountant, or tax advisor before starting the distribution process.

Work with NCH’s Tax Consulting Experts

What to Avoid When Dissolving an LLC

When dissolving an LLC, here are some mistakes to avoid.

• Rushing the entire process
• Distributing assets to members before settling all creditor claims (This mistake can hold you personally liable for an LLC’s debts.)
• Failing to cancel all business licenses, permits, and registrations
• Trying to close the business without following proper procedures

For more about the biggest mistakes that LLCs can commit, watch the Wealthy & Wise episode below.

Frequently Asked Questions

How long does it take to dissolve an LLC?

Your state’s dissolution requirements and an LLC’s specific type determine how long it will take to dissolve the business.

Generally, single-member and multi-member LLCs must start the dissolution process after deciding to close. Also, processing times for dissolution filings vary by state. Your Secretary of State may approve an LLC’s dissolution immediately if it’s filed online.

Can I dissolve my LLC if it has outstanding debts?

Yes, you can dissolve an LLC with outstanding debts. However, you must settle those payments before closing the business.

As you wind down operations, you should notify all known creditors and allow them to submit claims within a specified period. All outstanding debts must be settled before you can distribute assets.

What happens if I don’t file articles of dissolution with my state?

If you don’t file articles of dissolution with your state, your LLC will remain legally active despite being closed. This means that the business still needs to file annual reports, pay franchise taxes, and meet other ongoing compliance requirements.

Do I need to notify the IRS about my LLC’s dissolution?

Typically, you notify the IRS about your LLC’s dissolution by indicating that you’re filing your final tax return on the form. But if the business has an Employer Identification Number (EIN), the IRS advises you to send an EIN deactivation letter. You can get more information about this letter from the bureau’s official website.

Can LLC members be held personally liable for business debts after dissolution?

LLC members can’t be held personally liable for business debts after dissolution. However, the opposite may happen if the members:

• Made personal guarantees to creditors
• Owe taxes to federal, state, and local authorities
• Engaged in wrongful trading

What records should I keep after dissolving an LLC?

The records you should keep after dissolving an LLC include tax returns and their supporting documents. You may also want to keep asset-related documents, proof of previous insurance policies, and papers such as the Articles of Organization and business licenses. Store these documents in a secure location and grant all former members access to them.

Expert Tips From NCH

1. Start dissolving an LLC early. It’ll give you enough time to complete all compliance obligations and make rational decisions about your operations.
2. Review your LLC’s operating agreement before closing the business. It outlines your venture’s entire dissolution process, including member voting requirements and asset distribution.
3. Keep your LLC in good standing during the dissolution process. Continue to comply with federal, state, and local requirements until the business officially closes.
4. Document the entire dissolution process. Record information about the voting process, creditor notifications, debt payments, and asset distributions in writing.
5. Consult a legal or tax professional if compliance or tax-related issues arise during the dissolution process. Expert assistance costs less than the potential liabilities incurred from legal claims.

End Business Operations Without Any Issues

As an LLC owner, you may think that closing your venture is a simple task. Proper dissolution requires careful planning, continuous compliance, and thorough documentation. It’s a process that’s challenging but important for your future in conducting business.

If you’re considering dissolution, NCH offers comprehensive legal and tax expertise to help you make the right decision.

Contact Us Today

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.