Key Takeaways

  • Delaware LLC dissolution involves member approval, winding up business affairs, and filing a Certificate of Cancellation.
  • The LLC must settle debts, reserve funds for future liabilities, and distribute remaining assets before filing.
  • A Certificate of Cancellation should only be filed after all financial and legal obligations are handled.
  • Delaware does not require tax clearance before dissolution, but all taxes must be paid.
  • Business licenses, foreign registrations, and IRS accounts must be closed or updated accordingly.

If you're looking into Delaware LLC dissolution, there are some important things to know about doing it officially and legally. 

Cancellation is used by the state of Delaware to describe the dissolution of a Delaware LLC. The proper term for canceling an LLC is dissolution, but the term cancellation is often used. 

Many Delaware future owners want to find out how to begin their LLC, but they are unaware of the process of canceling their LLC if they go out of business. 

The Delaware LLC Act allows a Delaware LLC in good standing to exist indefinitely unless otherwise stated in the LLC Certificate of Formation or Operating Agreement. The exception to this is if the LLC lost its standing for failure to pay franchise tax or failure to keep a registered agent, or has chosen to file a formal Certificate of Cancellation. 

When a Delaware LLC stops operating, the Delaware LLC Act permits it to file a Certificate of Cancellation. Wait to file the certificate until the LLC has paid debts and creditors, stopped conducting the LLC's business, and provided reserved funds for the future of creditors for at least 10 years before the funds can be distributed to the members. 

If you don't file the Certificate of Cancellation, the LLC will continue to accumulate Delaware franchise tax annually. Failure to settle the tax will lead to an administrative dissolution when the franchise tax goes into arrears. The tax, penalties, and interest need to be paid in the event that the members choose to renew the LLC and bring it back to its previous standing. A public cancellation file prevents the LLC from accumulating future franchise tax, fees, and future interest. 

If a Certificate of Cancellation was accidentally filed, a Certificate of Correction is available to reverse the cancellation and keep the LLC in good standing. 

Steps to Take to Cancel an LLC

To ensure you've properly canceled your LLC, there are few important things to do.

  1. Check the LLC Operating Agreement. These agreements outline the requirements for canceling your LLC, such as giving the members a vote, and how many must be in favor.
  2. Take a member vote. If the LLC Operating Agreement doesn't include guidelines for canceling the LLC, the Delaware LLC Act states that it may be canceled with the consent of the members who own majority shares.
  3. Designate a manager to handle the affairs. Delaware insists that a company settle current debts and obligations, resolve any outstanding legal issues, and make provisions for any future liabilities. A liquidation manager can oversee these requirements and manage the allocation of assets.
  4. Pay off current and future creditors. Prior to releasing funds to members, the liquidation member needs to prioritize the debts and distribute the remaining funds to managers. Current creditors need to be paid, and a reserve fund needs to be set up for future creditors, spanning 10 years. Paying the members prior to this constitutes fraud and can void your cancellation, leaving you open to liability.
  5. Pay the franchise tax. Before filing your Certificate of Cancellation, the open balance on the franchise tax needs to be paid, plus the current calendar year's franchise tax.
  6. Pay the members. After completing the other steps, remaining funds can be allocated to the members of the LLC, following the guidelines within the Operating Agreement.
  7. File the Certificate of Cancellation. Once everything else is complete, you can file this document to formally dissolve the LLC.
  8. Resolve the business account with the IRS. For a multi-member LLC, the IRS can close the record once taxes are filed and the LLC indicates that this is a final return. It's best to send a final return to the State Division of Revenue authorities as well.

Once this is complete, you should receive a notice that includes the legal name of the LLC, the LLC address, the EIN and the reason for cancellation. If you have a copy of the IRS notice from when the EIN was assigned, that should be included.

Single-member LLCs are common and don't have to file taxes but must report on the member's Schedule C for self-employment income on the Form 1040 return. Other owners file a 1065 partnership tax return, which needs to be indicated as a final return, in addition to the state income tax for the LLC's operating state. 

Requirements for Winding Up a Delaware LLC

Once members vote to dissolve the LLC, Delaware law allows the company to continue existing temporarily for the purpose of winding up. This process includes:

  • Settling outstanding debts with creditors.
  • Selling or distributing company assets.
  • Defending or prosecuting lawsuits.
  • Canceling business registrations and licenses.
  • Filing final tax documents.

Designating a manager or member to handle these responsibilities helps ensure the process remains organized and legally compliant. The individual should document each step for transparency and future reference.

How to Notify Creditors of the Dissolution

Although Delaware does not mandate notification of creditors upon dissolution, it's strongly recommended for legal protection. You can:

  • Send written notice to known creditors with a deadline to submit claims.
  • Publish a dissolution notice in a local newspaper as a public record.

Doing so helps limit liability and may prevent disputes after the LLC has been dissolved.

Order of Payments During Dissolution

Delaware law outlines a specific order in which financial obligations must be satisfied during LLC dissolution:

  1. Creditors (including members who are also creditors).
  2. Members owed distributions after prior resignations.
  3. Return of capital contributions made by members.
  4. Remaining assets are distributed among members per ownership percentages or the operating agreement.

Following this hierarchy ensures compliance and protects members from liability.

Closing State and Federal Accounts

To fully terminate your Delaware LLC, ensure all state and federal accounts are closed:

  • Delaware Division of Revenue: Indicate final returns and close out state tax accounts.
  • IRS: Submit final federal returns (Form 1065 for partnerships, 1120 for corporations). Check the “final return” box.
  • Business Licenses: Cancel any industry-specific or local licenses.
  • Close bank accounts and terminate vendor contracts.

Failing to close these accounts could result in future fees or audits.

Canceling Foreign Registrations

If your Delaware LLC was authorized to do business in other states, you must cancel those registrations separately. This usually involves filing:

  • A Certificate of Withdrawal or
  • A Termination of Registration with each state's business division.

Otherwise, the LLC may continue accruing fees or taxes in those jurisdictions.

Frequently Asked Questions

1. Do I need tax clearance to dissolve a Delaware LLC? No, Delaware doesn’t require tax clearance, but you must pay all due taxes before filing a Certificate of Cancellation.

2. How do I notify creditors of my LLC’s dissolution? While not legally required, it’s recommended to notify known creditors in writing and publish a notice in a local newspaper.

3. What happens if I don’t cancel my Delaware LLC? Your LLC will continue to accrue franchise taxes. Failure to pay can result in administrative dissolution and additional penalties.

4. Can I reverse a Delaware LLC dissolution after filing? Yes, you may file a Certificate of Correction to reverse the cancellation, assuming other statutory requirements are met.

5. What is the cost to dissolve a Delaware LLC? As of 2023, the filing fee for the Certificate of Cancellation is $200–$220 depending on the method of submission (online or paper).

A lot goes into the dissolution of an LLC in Delaware. You may want to consult a professional attorney to decide what's best for you. 

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