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There are various reasons why businesses shut down. It could be due to a decrease in sales caused by an economic downturn or the decision to pursue a financially secure job at a large corporation. Running a business requires significant effort, and investing more time and money into closing it down is challenging.
Closing a business isn’t quick; it involves an extensive process. Properly allocate sufficient time to tie up all loose ends. By following the appropriate procedures, you can protect yourself from potential liabilities and smoothly transition into your new ventures as soon as possible. Regardless of its reason, here’s how you can dissolve an LLC effectively and ensure that everything is handled correctly.
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How to Close an LLC in 12 Easy Steps
Closing your business requires careful attention to detail to minimize potential legal issues and financial obligations. To begin the process, you must officially dissolve your entity with the appropriate state agency, such as the secretary of state or corporation’s division. This typically involves submitting specific forms that vary depending on your location.
Alongside filing dissolution paperwork, additional practical measures need to be taken to wrap up your business affairs. These include informing your creditors about the closure, liquidating any remaining inventory and equipment, and settling outstanding debts.
Failing to wind up your company properly can result in personal liability for both yourself and fellow LLC owners regarding any outstanding debts accrued by the business. We recommend reviewing our checklist for essential steps for a comprehensive guide on closing a business.
While there’s a general framework for dissolving an LLC outlined below, each state may have its own unique requirements. To ensure compliance with local regulations, please refer to our detailed guide on dissolving an LLC in your specific state.
1. Confirm the Company Is in Good Standing
To wind up an LLC in the states where it operates, the company must have a good standing in those jurisdictions. Are the members of the LLC keeping up with their ongoing business compliance obligations, or have they neglected to file reports and pay fees?
If an LLC is no longer in good standing, it must follow the state’s guidelines for reinstating that status (which may involve filing for reinstatement) before its owners can dissolve the entity.
2. Hold a Vote to Dissolve the Business
The dissolution of a company may require either a majority vote or unanimous consent, depending on the state’s laws and the provisions stated in the LLC operating agreement. To make such an important decision, hold a meeting where the vote results are documented in meeting minutes.
Even if the company is a single-member LLC, it’s recommended (and possibly mandatory) to have a meeting and record a vote, even if only one member is present.
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3. File LLC Articles of Dissolution
Limited Liability Companies must submit a document called Articles of Dissolution (also known as Certificate of Dissolution or Certificate of Termination) to the relevant state authority, such as the Secretary of State office. It’s crucial to complete this form to avoid delays in processing that could result in unexpected expenses and other complications.
If an LLC has obtained foreign qualification to operate in states other than its home state, it must inform those states accordingly. Subsequently, it can terminate any registrations, licenses, permits, business names, and any other applications made in those particular jurisdictions.
Each state has its own set of regulations regarding withdrawing from doing business there. Typically, withdrawing a foreign LLC entails submitting a withdrawal application along with payment for the applicable filing fee.
The effectiveness of dissolving an LLC is typically determined by the date chosen during the LLC member vote. During this process, the business must complete various tasks to wind down its operations, such as notifying vendors, customers, and creditors and liquidating and distributing assets.
In certain states, businesses can set a dissolution date that falls within 180 days in the future. However, note that backdating a dissolution to an earlier date isn’t permissible.
It’s worth mentioning that filing dissolution paperwork will automatically terminate the LLC’s legal business name in the state. However, if the LLC had previously filed under a fictitious business name (also known as DBA), additional steps may need to be taken to cancel that particular name registration.
4. Notify the Company’s Stakeholders
Certain states need LLCs to inform their creditors and vendors about their dissolution prior to filing Articles of Dissolution. Some states mandate that businesses publish a notice of their dissolution in a newspaper or other publication within a specific timeframe.
These actions serve the purpose of informing the general public and creditors that the company is discontinuing its operations.
It’s courteous to inform customers about a business’s closure. Therefore, make sure to follow up on any unpaid invoices and notify your customers’ accounts payable departments of any changes.
5. Cancel Business Licenses and Permits
If a Limited Liability Company (LLC) has acquired licenses and permits for its business operations, notify the relevant licensing agencies about the closure of the company. This includes informing agencies responsible for zoning permits, as well as professional licenses such as those held by attorneys, registered nurses, accountants, and psychologists.
Failing to cancel these licenses could result in the obligation to renew them even if the company is no longer conducting any business activities.
6. File the LLC’s Final Payroll Taxes
If an LLC employs individuals, it must fulfill its payroll tax registration responsibilities. After compensating their employees for the last time, the company must submit state payroll forms and remit their taxes (SUI and SIT).
In cases where a company lacks sufficient funds to settle its employment taxes completely, it may be able to establish an installment plan or request an “offer in compromise” that allows it to pay a reduced amount to resolve the tax debt.
Limited Liability Companies must also provide each employee with IRS Form W-2 (Wage and Tax Statement) for the corresponding calendar year when final wages and salaries are issued. Similarly, if they have paid independent contractors at least $600 during the year that the LLC is closing, they must also issue IRS Form 1099-NEC (Nonemployee Compensation).
7. Pay Final Sales Tax
Once a Limited Liability Company (LLC) has sold taxable items and services, file its state sales tax forms and make payments accordingly. Once these obligations have been fulfilled, the LLC can proceed with closing its sales tax accounts at both the state and local levels, if applicable.
8. File Final Income Tax Returns
When it comes to closing an LLC with the IRS, business owners also have certain loose ends that need to be taken care of.
- When closing a multi-member LLC, submit the last Form 1065 (Return of Partnership Income) for the corresponding year. The IRS advises owners to select the checkbox indicating that it’s the final return. Similarly, members of the LLC should mark the “final return” box on their Schedule K-1 form (Partner’s Share of Income, Deductions, Credits, etc.).
- In the case of a single-member LLC owner, filing Form 1040’s Schedule C (Profit or Loss from Business) is required as part of their individual tax return for the year in which the business is concluding.
- If the business has employees, it’s mandatory to fulfill final federal tax deposits and report employment taxes, using either Form 941 (Employer’s Quarterly Federal Tax Return) or Form 944 (Employer Annual Federal Tax Return).
- The LLC must adhere to the procedures outlined by the relevant jurisdictions for reporting and settling final income tax obligations at the state and local levels.
Depending on the situation, different types of forms may be necessary at the federal, state, and local levels. Since regulations and procedures differ based on the location and nature of the company, it’s beneficial for business owners to consult with a tax expert for advice.
9. Sell Company’s Assets
Liquidating and selling the assets and inventory of an LLC can provide a means for the company to generate cash before its closure. This could be particularly advantageous for businesses experiencing financial difficulties, as they may not have enough funds to cover outstanding debts and claims from creditors otherwise.
Consulting with a qualified appraiser can be beneficial for business owners seeking assistance in determining the value of physical assets like furniture and equipment.
Intangible assets such as trademarks, copyrights, customer lists, and patents shouldn’t be overlooked as potential sources of income when dissolving an LLC. It would be wise to engage in discussions with an intellectual property attorney regarding these intangible assets including their value assessment process and their transfer.
10. Pay the LLC’s Business Debts
To ensure a smooth closure, an LLC needs to settle any outstanding debts owed to vendors, suppliers, and creditors before concluding operations. If the company lacks sufficient funds to pay off the entire debt amount, it may be feasible to negotiate a final payment arrangement.
Seeking guidance from a lawyer well-versed in the state’s laws on claims settlements can prove invaluable during this process.
11. Distribute the Remaining Assets
If an LLC has multiple members, it can distribute any remaining assets after settling its debts. It’s crucial for the LLC operating agreement to outline specific instructions regarding how these assets should be divided among its members.
12. Keep Business Records for Reference
After the closure of an LLC, its members may encounter inquiries or examinations for several years. Hence, members must preserve the LLC’s (as well as their personal) records about the company’s operations, forms, and transactions in a secure location where they can be easily accessed if required.
Important documents include tax returns and payment records, financials, employee payroll and employment records, and other business documentation.
The IRS provides recommendations on how long business owners should retain these records. Typically, a period of seven years is considered appropriate.
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How to Close an LLC – Buyer’s Guide
What Is Dissolution?
Dissolution refers to the formal procedure of terminating the legal existence of a business entity. To put it simply, it’s the process of closing down your business.
There are numerous motives for dissolving an LLC:
- Voluntary Dissolution pertains to the decision to cease business operations willingly
- Administrative Dissolution occurs when closure is enforced due to factors such as bankruptcy, failure to file annual reports, or neglecting tax payments
- Judicial Dissolution involves a court order for closure due to disagreements among members
Closing Correctly Is Important
It’s crucial to formally dissolve an LLC to avoid personal liability for any outstanding debts and taxes. Failure to do so can result in being held accountable for the LLC’s financial obligations.
Note these extra charges you need to be aware of:
- Several states impose an annual fee on LLCs. Failure to appropriately dissolve a company will cause the continuous imposition of this fee
- A fee is applied in certain states if an active LLC neglects to file a tax return. Failing to close the LLC may lead to incurring such charges
Ownership of property
You must ensure that ownership of the property held by your LLC is transferred to you only after completing the official LLC dissolution process. Check that the transfer of ownership has taken place.
Permits and company name
To safeguard yourself from potential legal complications, it’s crucial to properly conclude all permits and relinquish the name of your company through a formal dissolution of the LLC.
This will prevent any unauthorized individuals from taking advantage of these permits in your absence. Failing to monitor and deactivate them may expose you to risks without your awareness.
How Long Does It Take to Dissolve an LLC?
The time required to dissolve an LLC differs from one state to another, typically ranging from one to two weeks. However, if complications arise, like the need for asset liquidation or unforeseen creditors asserting claims on the business, the process may extend up to six weeks or more.
It’s possible to expedite the process and complete it within a few days by opting for expedited services at an additional cost through your attorney.
Types of LLCs to Dissolve
There exist two primary categories of LLCs: solitary proprietorship and multiple ownership.
Single-Member LLCs
A solitary individual assumes ownership of the company in a sole proprietorship. Typically, sole proprietors establish single-member LLCs to benefit from the limited liability they provide. To become an LLC, a person can file articles of organization with their state and designate themselves as the lone member. For additional details, refer to our article outlining the distinctions between sole proprietorships and LLCs.
Multi-Member LLCs
In a multi-member Limited Liability Company (LLC), the business is owned by more than one individual. A multi-member LLC doesn’t impose any restrictions on the number of owners it can have. Typically, these types of companies are established by a collective of two or more individuals seeking to establish an official business entity. Multi-member LLCs serve as an alternative option to partnerships and corporations.
What Is the Difference Between Dissolving and Winding up an LLC?
To bring your LLC to an end, you can dissolve it through a vote and by submitting the necessary dissolution paperwork to your state. Alternatively, you can wind up your LLC by completing all outstanding business obligations and operations. This winding-up process encompasses various tasks that need to be accomplished.
- Informing creditors
- Submitting ultimate tax returns
- Liquidating assets
- Settling debts
- Terminating active business contracts
- Shutting down bank accounts and
- Revoking licenses, permits, and registrations
What Is the Difference Between Terminating and Dissolving an LLC?
The act of “Dissolving” an LLC involves voting to bring your LLC to an end and submitting the necessary dissolution paperwork to your state. On the other hand, “terminating” an LLC can have various interpretations.
In some cases, people use “Terminating” and “Dissolving” interchangeably when referring to ending an LLC. However, in certain states, you must file articles of termination instead of articles of dissolution to terminate your business with the state legally. Alternatively, “Terminated” may signify that an LLC has been completely dissolved and its operations have ceased.
How Much Does It Cost to Dissolve an LLC?
The filing fee varies by state. Usually, the fee ranges between $25 and $100. Some states, like California, have no filing fee. There might be other costs related to dissolving your LLC, such as the fee to obtain a tax clearance certificate, a publication fee, or attorneys’ fees.
What Happens to Your EIN After You Dissolve Your LLC?
In a technical sense, it’s not possible for the IRS to invalidate your EIN. Once an EIN has been allocated to your business, it becomes permanently associated with you and will never be given to another entity.
However, if you decide to dissolve your LLC and no longer require a business account with the IRS, there’s a process to close it.
You would need to write a letter containing specific information and send it to the IRS.
- The official name of your business
- Your business EIN (Employer Identification Number)
- Your business address
- The explanation for closing your account
- A duplicate of your EIN assignment letter (if retained)
To finalize the closure of your account, complete and submit all outstanding tax returns while settling any owed taxes that may be due.
Best LLC Services to Help Your Process
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ZenBusiness is an LLC-forming company designed to assist entrepreneurs and small business owners in initiating and expanding their companies. They offer cost-effective and all-inclusive packages for forming LLCs, which include services such as registered agent assistance, annual report submission, and additional perks.
Furthermore, ZenBusiness provides ongoing aid and access to valuable resources to ensure businesses comply with regulations while achieving success.
Swyft Filings is a company that focuses on quickly and effortlessly forming LLCs. They provide various services for LLCs, such as incorporation, compliance, and registered agent services. Swyft Filings also offers personalized assistance to guide businesses through forming an LLC and ensuring they meet all state and federal regulations.
Can Someone Sue My LLC After It’s Dissolved?
Certainly, individuals can still claim your business as long as their claim falls within the timeframe specified by the statute of limitations. This legal concept defines the period when a person can file their claim before it becomes invalid or unenforceable.
For instance, let’s say that according to your state’s legislation, individuals have three years from the date of their LLC dissolution to initiate a claim. If they file after this three-year window, their claim will be dismissed.
Note that each state has its own statutes of limitations and regulations regarding how long someone has to bring forth a claim against your business, even if it has already been dissolved. To ensure accuracy and compliance with applicable laws, consult your state’s specific legislation for further details.
Can You Reinstate a Dissolved LLC?
The answer to this question relies on the laws of your specific state. In certain states, you can only reinstate your LLC if it was administratively or involuntarily dissolved. An administrative or involuntary dissolution occurs when you fail to fulfill state requirements, such as submitting annual reports or paying taxes.
For your LLC to be reinstated, you must address and rectify the issue that led to its involuntary dissolution. For instance, if a court dissolved your LLC due to non-compliance with filing an annual report for two consecutive years, you must first file those reports and pay any associated fees before reinstatement.
Some states may allow the reinstatement of a voluntarily dissolved LLC. If you choose voluntary dissolution but later decide to retain your existing business name rather than start a new one, opting for reinstatement might be more favorable.
How to Close an LLC – Frequently Asked Questions
Bottom Line
Shutting down an LLC requires adhering to legal protocols, resolving financial responsibilities, engaging with stakeholders, keeping meticulous documentation, submitting final tax forms, formally dissolving the LLC with state bodies, and safeguarding your brand.
Carefully navigating through each stage guarantees a responsible closure and seamless transition into new avenues. It may be advisable to seek professional guidance to ensure a well-executed procedure.
