If you’ve been struggling to make your business work and it’s fallen further behind than you can keep up with, you may be thinking about shutting your doors for good. Not only that, but you have a lot of debt and you have no idea how to clear it up! So you’re wondering if you can close an LLC with debt? The answer is yes. But it’s important to understand the legal, regulatory and administrative aspects of closing an LLC with debt and determining how to properly dispose of the business to avoid incurring any unnecessary liability. This is especially important when the company has a lot of debt.
The Legal Process of Dissolution
You can’t just close your LLC as if it’s a business with no ongoing liability and hope to dodge some legal consequences. This requires going through the legal process of dissolution and winding down the company. You want to go through the process of closing up shop properly to ensure that the company is fully dissolved and you aren’t liable for something you don’t need to be. You don’t want to create a bigger problem.
As an LLC owner, you’ll need to “wind up” the business first, meaning tie up all your loose ends. For instance, you’ll have to notify claimants about the dissolution of your LLC, defend or prosecute any claims against the company, inventory the LLC’s assets and distribute them to members, sell them, or use them to settle liabilities, and pay taxes and reconcile with both state and federal tax authorities. In other words, you get your ducks in a row before you pull the plug. It’s like packing your bags for the last time to move out of your old apartment. You pay the landlord, dispose of your stuff, clean out your mail and make sure nothing is forgotten.
Telling anyone with a claim against your business about the dissolution helps ensure that they have a fair opportunity to present their claims. Defending or pursuing ongoing lawsuits and claims can take a lot of time and energy. Doing so before closing your business can save you lots of headaches down the road. Taking inventory of the LLC’s assets and determining how to manage them properly helps ensure you’re doing everything you can to pay off the debts owed to others.
The exact rules vary, and some states have a specific procedure for dissolving LLCs. For example, Texas doesn’t have a state LLC law that covers dissolution, so you’d follow the Texas Business Organizations Code instead. Then you’d file a Certificate of Termination with the Texas Secretary of State, attesting that you adhered to the Code.
There are other steps involved in the process, of course, like liquidating assets, paying employees, terminating leases, and settling debts. This is a time-consuming and often complicated process, but you do it to protect yourself from future liability. Because no one wants to close their business and still be on the hook for the debt.
As the owner of an LLC, you are shielded from personal liability for debts the LLC owes. While your personal assets are safe from the LLC’s creditors, the company itself will need to address how it settles with those creditors. So before you close, you need to give your creditors notice. In Texas, that means sending a notice to all known creditors via certified or registered mail and notifying them of a deadline to submit a claim. This allows them to seek payment of the debt before the LLC is dissolved. As you receive these claims, you will need to evaluate them individually. Review whether each claim is legitimate or if there is any room for dispute. You’ll need to sift through your records to find out if the debt is actually owed and the proper amount.
Pay the Creditors
Look, I understand. You’re drowning in debt. You don’t know how you got to this mess. So just stop returning the creditor’s phone calls. Right? Wrong. You can’t just disappear into the night as if nothing ever happened after a company closes down with open debts.
If you can, pay your creditors as much of the debt as you can. Use your cash. If you’ve run out of cash, sell your business assets to pay the creditors. You must pay your creditors evenly and fairly. If you give any of your creditors preferential treatment over another (for example, you might be sympathetic to a supplier or friend) you could be breaking the law. Once all your debts have been paid, any assets you have left or sale proceeds from selling your LLC assets can go to you and the other owners of the LLC. Owners never take any of the LLC assets before the debts are dealt with and the accounts are closed. I know you may be tempted to just take the assets and leave, but don’t do it. You’ll regret it.
Negotiate a Settlement
Now, let’s say you used all of your cash and sold all of your business assets to pay your creditors, and you still have some remaining debt. Then you need to talk to those remaining creditors to negotiate a settlement for less than the amount that you owe. If the money you actually have available can cover the settled amounts, I highly encourage it, because you then have every debt paid and every account closed before you can officially dissolve your LLC. Think about your options realistically before approaching your creditors. This can be hard, because it makes your business look bad to take this step, and sometimes you really would rather avoid it if possible. It’s all part of the process of working through this, and it’s not something you should be afraid to do.
When you sit down with a creditor, your main goal is to ask for a reduction in the amount you owe them. It may be challenging to change their minds about this, but you should go into the conversation prepared to present a compelling case to them as to why a reduction is warranted. What you want to say is, “Yes. I understand I owe you money. And I am hoping we can come to some sort of agreement so that I can pay you less than the full amount.” You’ve already taken every action you can to pay this debt. That shows a creditor they have your good faith. The idea is to offer to pay out your debt for less than what you owe, based on what you have available and can afford to pay.
The important point is that you need to make sure that you go through the legal process of winding up the LLC, giving claimants notice of the dissolution, assessing claims, resolving them, and closing every account before you file. Tying up these loose ends will give you peace of mind, protect you from liability, and enable you to move on with your life.
