1. Dissolving an LLC

Dissolving an LLC

Author: Real Estate Holding Company

Published Jul 17th, 2023Updated Feb 14th, 2024
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A limited liability company (LLC) is a popular business structure used by professionals today. As Investopedia mentions, members of an LLC are not responsible for the company's debts or assets. LLCs tend to be hybrid entities that combined the characteristics of a corporation with those of a partnership or a sole proprietorship. With the influx of new businesses being formed, several entrepreneurs have opted to register their enterprises as LLCs. The registration process is straightforward in many jurisdictions. Depending on the location, you may not even need to pay taxes on the company's earnings either.

Typically, LLCs operate for a certain amount of years and then dissolve. The dissolution of an LLC usually happens when the company has achieved its purpose and no longer needs to function. Occasionally, dissolution may follow when the business ceases to be economically viable. In rare cases, the LLC may become dissolved when the members who make up its board of directors have an impasse regarding the company's direction. In each of these situations, the process of dissolution remains the same. But what is this process of dissolution? How does a company simply dissolve?

The Process of Dissolution

Step 1: LLC Action

The first step in dissolution starts with the vote to dissolve the company. The LLC's bylaws usually stipulate that the dissolution must follow a resolution from the company's director. Thus, the director drafts up the dissolution document and presents it for a vote. The members then vote on the dissolution and, if it passes, the LLC action is complete. The process is much more simplified for single-member LLCs since there aren't other members to vote on the resolution.

Step 2: Filing Certificates of Dissolution

Once the LLC action is completed, the company must file its certificates of dissolution with the state. If the company has articles of incorporation registered in other states, it also needs to file certificates of dissolution in those regions as well. The certificate or articles of dissolution are a document filed with state boards to formally cease the operation of a registered company. Each state has its own process for filing its certificates of dissolution. Some jurisdictions require tax clearance before the articles of dissolution are approved. If a business has outstanding taxes, it isn't allowed to dissolve.

Step 3: Filing State, Federal, and Local Tax Forms

The business's tax status won't change as soon as it finishes dissolving. For that to occur, the company needs to file the relevant forms with the state, federal and local authorities. Payroll reporting for employees also needs to be dealt with. The IRS has a handy checklist available on their Business Closing Checklist [https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business] Businesses can use this to double-check that they've submitted the proper forms to the relevant authorities. An LLC should also cancel its EIN and any permits or licenses it has. This step frees up the LLC from obligations allowing it to move to the next stage of dissolution.

Step 4: Informing Creditors of Closure

The business's creditors will need to be notified in writing that the business is closing. The written notice should include the following:

  • Notice that the business intends to close
  • The address that they should send their claims to
  • A list of information that the claim should have
  • The deadline date for submitting those claims (typically 120 days after the date of the notice)
  • A statement that claims received after the deadline will not be entertained.

Some states allow for claims from creditors that are not known at the time of the company's dissolution. A business may need to place a notice in the local paper about its dissolution in such states.

Step 5: Paying Debts

The claims by creditors can be either accepted or rejected by the company. If the company agrees with the claim, they are responsible for making arrangements for the creditor to get their money. The claim might not be settled for the total amount, and negotiations may reduce the settlement amount to something more acceptable to the creditor. If you reject a claim, the creditor must be informed in writing. This correspondence should also contain the reason for rejecting the claim.

Step 6: Distributing Assets

Once claims are paid, the remaining assets of the business would be distributed to the members of the LLC. These assets are distributed based on the ownership percentage of the members. All distributions are to be reported to the IRS as well. If the company has different classes of stock, it may need to distribute asset distribution according to the company's bylaws.

How Long Does Dissolution Take?

The amount of time it takes to dissolve an LLC varies from state to state. Following the step-by-step outline to dissolve the company requires following the requisite timeline for some processes (such as dealing with claims). The boards that process the dissolution might take longer on some processes, extending the amount of time it takes to get the company dissolved.

What Happens After Dissolution?

After a company is dissolved, it is no longer in operation. If you'd like to reopen the company after dissolution, you can. However, you should examine the company's previous performance to see where issues happened and how those could be resolved. Some states require additional paperwork to restore the company. If the company is dissolved and all the creditors paid, you aren't liable for any other payments to those parties. In states where tax obligations aren't a part of the filing for dissolution, you may still be responsible for paying those taxes even after the company no longer operates as a business. Dissolving a company happens when it's no longer viable to keep it in operation. Determining whether a company ought to be dissolved falls to the director and the investors.

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