Do I Need To Dissolve My LLC: Everything You Need to Know
Do I need to dissolve my LLC? This is generally not a pleasant question to contemplate. 4 min read
2. How to Dissolve an LLC
Do I Need to Dissolve My LLC?
Do I need to dissolve my LLC? This is generally not a pleasant question to contemplate. It may be a necessary one if your business has or is on the course to becoming insolvent, is facing mounting legal difficulties, or if you are just ready to move on to another chapter in your life. However, dissolving your LLC is not as simple as just turning off the lights and walking away; there are certain specific steps you must take to officially dissolve your business, and taking them is recommended.
If you do not complete formal dissolution, creditors may continue to demand payment on debts and government agencies will assume you are still in business and thus expect you to file annual reports, pay annual fees, and pay taxes. By completing dissolution, you also greatly reduce the chances of future lawsuits, debts, fees, or fines related to your business. So, as unpleasant as dissolution may seem, it is best to go through with it.
How to Dissolve an LLC
There are many aspects to the dissolution process, but regardless of your business situation, the following steps will most likely be necessary:
- Consult your business articles. Sole proprietors need not worry about this, but if you are in a general partnership without a written partnership agreement, you must provide notice (ideally in writing) to the other partner of your wish to withdraw, and if you are in a multi-member organization, you must honor the dissolution provisions of your formation documents, such as might be in your operating agreement.
- File the required dissolution documents. Sole proprietors have no filing obligations with the state. General and limited partnerships that filed documents with the state when their business started are required to file dissolution papers.
- Notify tax agencies. You cannot complete dissolution until all your taxes are paid. While doing so, you must also be careful of filing dates. For instance, while in dissolution, a Form 1065 requires filing within three months of a partnership’s termination.
- Acquire a tax clearance. Some states will not let you dissolve until you obtain a tax clearance, verification of good standing, or a consent to dissolution from the state tax agency. You cannot obtain this, however, until your last tax return has been filed and all owed taxes have been paid.
- Cancel all business licenses. Cancellation paperwork with the agencies that issue licenses must be filed. If you don’t cancel them, others could use your business name or account and you would have to pay any taxes or penalties related to those licenses.
- Cancel all out-of-state qualifications and registrations. If your business is registered to conduct business in other states, you must file a withdrawal form related to your right to do business there. If you do not, you will be required to pay minimum taxes and annual report fees to those states, even after dissolution.
- Notify creditors. When you dissolve, you are obligated to notify creditors and provide contact information for claim requests as well as the deadlines for those claims. Insurers, lenders, vendors, service providers, and suppliers should also be notified and all business with them should be wound down.
- Settle with creditors. When dissolution occurs, creditors will likely try to stake a claim. Not all claims may be legitimate, so an attorney would be helpful in advising you what claims can be rejected. Creditors with legitimate claims need to be paid in full or honored with a compromise.
- Collect owed money for the LLC. If money is owed to your business, you will want to try to collect it before dissolution is complete, as attempting to collect for a nonexistent company is much more difficult. When collecting, you are not required to say that your business is in dissolution, unless the money is owed by employees or clients, depending on your state’s laws.
- Inform stakeholders about dissolution. Your employers and landlord (if you have one) will need to be informed. Employees should be paid any final wages or benefits. When informing your landlord, follow your lease agreement rules concerning lease termination.
- Sell and distribute your assets. Once creditor claims have been settled, remaining assets should be dispersed proportional to the investment each owner has in the business. If financial assets or stocks need distribution, you may want to consult with an attorney for advice concerning state laws related thereto.
- Meet with an attorney. Working with the right attorney during dissolution is as important as doing so during formation. You want to make sure that every aspect of dissolution has been covered to your best advantage, and an attorney can help you do that.
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