Delaware LLC Dissolution: Everything You Need to Know
If you're looking into Delaware LLC dissolution, there are some important things to know about doing it officially and legally. 3 min read
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- File the Certificate of Cancellation. Once everything else is complete, you can file this document to formally dissolve the LLC.
- 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.
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