Delaware LLC Cancellation: Everything You Need to Know
Delaware LLC cancellation is the act of officially dissolving a business entity that was previously registered in the state of Delaware.3 min read
Delaware LLC cancellation is the act of officially dissolving a business entity that was previously registered in the state of Delaware. Dissolution is a formal business process and will put your business out of the reach of creditors and other liability holders. Dissolution may be voluntary or involuntary by court decree.
Starting a Voluntary Delaware LLC Cancellation
Generally speaking, LLC agreements contain a section or clauses with instructions for cancellation. Most often, the first step is to inform the board members that a meeting will be held regarding dissolution, and a place and time for the meeting is scheduled in advance. At the time and place appointed, a vote will be held among the board members to see if the majority requirements for agreeing to dissolution are met.
Delaware law also permits a vote bypass in special circumstances, if members owning more than two-thirds of the company's shares or interests affirm their consent for dissolution. In either case, whether a full vote or an affirmation by majority interest holders, formal minutes of the final decision should be kept.
Winding Up After LLC Cancellation
After the final vote to cancel, the LLC will persist in existence until all final business is handled. This is called the winding up phase, and essentially it is only to tie up loose ends and not to embark upon anything new. During the final meeting, one or more board members or managers may be appointed as the heads of the winding up phase. Key tasks in the Delaware LLC cancellation winding up phase include:
- Closing the business's physical locations
- Settling all business with customers and suppliers
- Selling or disposing of all company property
- Discharging or making arrangements for all liabilities
- Continued prosecution and defense of current lawsuits
- Distributing final assets among the LLC's members
- Closing the LLC's bank account and making arrangements for paying the final dissolution-related fees
Paying Off LLC Liabilities
Delaware law states clearly that liabilities are to be discharged before any members may collect among final assets. This means sufficient compensation must be made for any liability claim made against the company, or at least a reasonable provision. Liabilities most often take the form of loans, taxes, contracts, or lawsuits. In the case of a contract, any valid contract is a liability. This means valid contracts for the future, contingent contracts, conditional contracts, or un-matured contractual claims must all be discharged satisfactorily to the liability holder.
The law further states that the timeframe for compensation of liabilities is 10 years after the date of dissolution, and it applies to liabilities that may not yet be known as of the date of the final cancellation decision was made. If you are dissolving your bank account, provisions will need to be in place to settle liabilities within the 10-year time frame.
Order of Liability Payments
The law goes further than stating that liabilities must be paid in that it also specifies the order in which payments must be made. The order is:
- All creditors and liability holders must be paid first, including the federal and local governments to whom the LLC may owe tax liability.
- All approved distributions to members independent of the dissolution must be made next, unless the rules of the LLC state otherwise.
- Final distributions can then be made to members, according to contribution and LLC share ownership.
Creditors and liability holders legally are owed according to a binding contract, and dissolution on its own does not release those debts.
Certificate of Cancellation
After the wind up phase is completed, the final step in a Delaware LLC cancellation is to file a certificate of cancellation with the Secretary of State. The state has forms you can fill out to certify your cancellation, and you should keep any proof of the vote to dissolve, such as the final minutes from the cancellation meeting, in case the Secretary of State requires further proof.
The certificate generally costs $200 with expedite fees as needed. This will officially cancel your LLC's formation, and it will no longer be a legal business per the state of Delaware. It is also important to obtain the certificate to close your LLC bank account.
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