How do I dissolve my LLC and handle its debts and taxes?

If you neglect to properly terminate your LLC, you could end up with personal liability for the LLC’s debts and obligations. Follow these steps to make sure you close your LLC the right way.

The people who own an LLC are called members. When closing one down, there are two parts: dissolving the business (telling state agencies it’s over), and winding it up (paying debts and handing any leftover assets to members). The exact steps you need to take are set by state law and your LLC’s operating agreement. If your agreement is missing or silent, the state’s default rules fill in the blanks.

Three Ways an LLC Can Be Dissolved

In the beginning, an LLC is created by owners filing paperwork with the government. Naturally, that’s how it ends too, by filing paperwork. Unlike the creation of a company, however, a dissolution can be started by either the government or the company’s owners. There are basically three ways an LLC can be dissolved.

Voluntary dissolution: Members can choose to close anytime, and to do that, they simply need to vote to do it. Members may also have set a closing date in the operating agreement at the beginning, or given certain things that must happen before the LLC ends.

Judicial dissolution: A judge can dissolve a company. These kinds of decisions are rare, and typically focus on companies formed for illegal purposes, like hiding assets from creditors.

Administrative dissolution: Members need to keep the company’s taxes paid and file annual reports. If they don’t, the state can dissolve the LLC. Members may be able to cure the lapse, by filing the overdue report, for example. A long lapse may mean that reinstatement is too late.

Vote to Dissolve It

If members want to close the company down, a first step is to vote to dissolve it. Check the operating agreement to learn if a simple majority or a unanimous vote is required. Write a resolution, and date and sign it. Get each member to sign the resolution or written consent. It’s a good idea to record the decision and keep it with the company’s records.

Keep employees and creditors informed. Notify employees that the company is closing, and make sure their final wages are paid. An important part of winding up is paying creditors, which includes banks, vendors, landlords, utility companies, and many others. When you notify them, include a statement that the law allows creditors up to 90 to 180 days, or whatever the state requires, to make a claim. The state may also require you to put a public notice in the newspaper.

After the time for claims has expired, creditors can’t come after the LLC unless its members acted wrongfully. They have to prove that the members knew about the debt when they dissolved the LLC, and left it unpaid, or that the LLC ignored the notice rules. If that happens, the member may be personally liable for the debt, up to the amount they received from the LLC during dissolution. Otherwise, limited liability applies, unless a member guaranteed the debt, or a creditor pierces the corporate veil.

File Dissolution Papers

Members file dissolution papers with each state where the LLC registered. The paperwork varies from state to state, but states typically call these forms Articles or Certificate of Dissolution. Many states charge nothing to file, and some charge a fee.

If an LLC dissolves and doesn’t file dissolution paperwork, it will still be required to pay annual fees and taxes. Members can’t just leave it legally open. It will keep racking up tax bills and fees for them, that they have to pay before they get any of the company’s assets.

There are lots of state and local agencies that license or permit the LLC to operate. When the company shuts down, a final step in closing down operations is to cancel each of these licenses or permits. Canceling the permits may help protect against an unauthorized use of them, and will stop any further fees or penalties from building up.

Before dissolving the LLC, you have to pay all outstanding taxes, as well as payroll taxes if you have employees. File a final tax return, the same as an annual return, but mark it final. Some states want their tax agencies told at dissolution, and they may want to see that you have no taxes owed. If the state requires a Certificate of Tax Clearance, get that too.

The final step of closing an LLC is to hand out its remaining assets to members. Creditors come before members. Once every debt is paid, the LLC is free to distribute its remaining assets to members. The LLC’s operating agreement says how the remaining assets are divided. If the operating agreement does not say, or is missing, then state laws will say how to divide the assets. Some assets, like real estate, are hard to split and may need to be sold, with members getting a share of the proceeds.