How to Close an LLC: Everything You Need to Know
How to close an LLC is a topic that many limited liability company owners who are thinking about retirement want to learn more about. 6 min read
Updated May 4, 2022:
How to close an LLC?
To close an LLC, the members need to surrender the authority of the company to do business. They can do this by sending a complete Articles of Dissolution to the secretary of state. However, filing these dissolution papers is one part of closing a limited liability company. The LLC is registered with the state where the articles of organization were filed. Dissolution resolution, Articles of dissolution, and IRS form 966 are required to cancel a LLC. Read our step by step process below and get help from an UpCounsel lawyer once you are ready.
What could happen if you don't properly dissolve your LLC?
If you don't dissolve a limited liability company properly, you could face personal liability for the following:
- Unpaid taxes
- Unpaid debts
- In many states, limited liability companies are required to pay a fee. If you don't dissolve the company properly, you could be required to pay this fee every year. Other states only charge a fee if the limited liability company is open and doesn't file a tax return. Therefore, if you don't close the LLC properly and don't file a tax return, you could face a fee.
- If you own property in the name of the limited liability company, you will not receive the property back until the limited liability company is dissolved properly.
- It is essential that you complete a formal LLC dissolution to give up the company name and to close the permits. That way, no one will be able to use the company name or permits. If you leave the limited liability company active and neglect to monitor it, someone else could use the LLC and put you in legal trouble.
Voluntary LLC Dissolution
For Voluntary Dissolution of a LLC, Articles of Dissolution or Cancellation with the state agency that helps form the LLC needs to be filed. All-State Taxes and Fees are required to be settled at the time of filing of the article of dissolution is required by most state agencies.
Involuntary LLC Dissolution
In some states, being idle will cause the state to coerce involuntary dissolution of the LLC for not adhering to the state's requirements which need to be filed yearly. Abandonment is the process in which a state cancels or dissolves a charter that has failed to maintain to upkeep the state's filing requirements.
Steps to Cancelling an LLC
If your reason for dissolving the LLC is to form a corporation, check the state rules to transfer. Some states allow LLC to be converted to corporations without having to go through the process of LLC dissolution and corporate formation. The following is the typical dissolution process:
Step 1: Vote to dissolve your LLC
If you have a board of directors for your Limited Liability Company, the Articles of Organization usually require a vote by the board to dissolve the LLC. if the LLC does not have a board of directors, the principal members named in the Articles of Organization may hold a vote or follow the rules outlined in the LLC's bylaws to begin dissolution.
Some LLCs require votes representing the bulk of shares, and some necessitate unanimous consent, depending on state law and the requirements of any operating agreement that might be in effect. Before dissolving a LLC, get tax and legal advice. One of the first things you need to check on is your Buy-Sell Agreement which sets out the rules for Limited Liability Companies when they dissolve or when an LLC member chooses to move on. Buy-Sell might have pertinent information for this process but if it doesn't you might consider making one before dissolving in earnest.
Step 2: Filing federal, state, and local tax forms (e.g. IRS Form 966)
Draw up a written resolution stating the purpose to dissolve the LLC, have every member who voted for the dissolution sign and date it, and dispenses a copy to every member, because this might become significant if the validity of the dissolution is tested later. The procedure for filing the Certificate of Dissolution (also called Articles of Dissolution) differs by state.
Some states need filing documents before informing creditors and resolving claims; others need filing after that process. Certain states need tax clearance for the business before the Certificate of Dissolution may be filed. In these cases, any back-taxes due by the company or LLC has to first be paid. Contact your registered agent, online incorporator, or Secretary of State's office to learn more. File Form 966 with the IRS within 30 days of the date of the dissolution resolution, so that the Limited Liability Company won’t be subject to federal tax filing obligations.
Step 3: Cancel all LLC licenses and permits
Contact the government agencies that issued the permits and licenses for the LLC, and inquire how to cancel said licenses and permits. In some cases, entering into another business structure or LLC, you may be able to transfer an LLC's licenses and permits to that business entity.
Satisfy creditors and the tax authorities. Each known LLC debts need to be paid before any LLC assets can be dispersed to members. Get a tax certificate from the state government, founding that the business is current on its tax reporting duties if this is required by the state.
Contact the IRS to cancel the LLC’s Employer Identification Number. Technically speaking, the IRS does not actually cancel an Employer Identification Number; it refers to EIN cancellation as "account closure." Cancel or withdraw the LLC’s fictitious name or DBA with the state or local government agency that issued it. Ending operations does not end tax reporting obligations.
Step 4: Notifying creditors your company is ending
All the company's creditors must be noticed by mail, and explain that the company has been dissolved or has filed the statement of intent to dissolve. Your state might allow for claims from creditors that aren’t known to the business at the time of dissolution. Communicate the dissolution in:
Public notice in the local paper about the dissolution may be required is mandated by the state.
Mail clients a letter to inform them the LLC is dissolving.
Mail creditors of intent to pay the full balance owed by the LLC, a settlement offer, or intention to file bankruptcy.
Step 5: Settling claims from creditors
Creditor claims can be acknowledged or rejected by a liquidated business. Accepted claims have to be paid or satisfactory arrangements made with creditors for repayment.
Rejected claims should be advised of in writing.
Consult with an attorney to assist proper notice of all creditors affected by the impending dissolution. Creditors are subject to a deadline for filing claims that varies according to state law.
Step 6: Distribution of assets remaining
After paying claims, outstanding assets can be dispersed to business owners in proportion to the share of ownership. Dispersals have to be reported to the Internal Revenue Service. If your corporation has numerous stock classes, corporate bylaws characteristically outline the procedure for dispensing assets to these shareholders.
For details on distribution and your ongoing contingent liabilities, contact an accountant or tax adviser. Follow state law in addition to the Limited Liability Company's bylaws and equitably distribute any LLC assets to all members.
Step 7: Final Filing of Articles
File Articles of Dissolution, or your state's equivalent, with the Secretary of State of the state in that the Limited Liability Company was formed meaning you’ll need to give the name of the LLC, the active date of dissolution, and the motive for dissolution. Many states offer an online form on the Secretary of State's website. You will have to pay a small filing fee. There is a small filing fee to file Articles of Dissolution. File the LLC’s final tax return with the IRS and state tax authorities. File the articles and other paperwork with the Secretary of State or corporations division of your state.
Who to Notify After Dissolving your LLC
After formally dissolving an LLC, you must notify those that may have an interest in the entity’s activities (i.e. bank, clients). The Secretary of State in the state jurisdiction where the business is maintained is the proper point of contact for the official notice.
If you need help with how to close an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.