How to Dissolve an LLC: Everything You Need to Know
Knowing how to dissolve an LLC starts with knowing that a Limited Liability Company is easier to form than dissolve. 7 min read
How to Dissolve an LLC
Knowing how to dissolve an LLC starts with knowing that a Limited Liability Company is easier to form than dissolve. When an LLC dissolves as result of inactivity, the proper procedure must be followed to formally cease operations. LLC are business entities structured to provide a tax-exempt “pass-through” for owner income recognized by the United States federal Internal Revenue Service; while buffering an owner(s) from liability for debt or legal problems associated with the business.
Dissolution can be written into a LLC partnership agreement from the outset, if an entity is set up for a limited period. Sole proprietorships do not form agreement, and therefore may dissolve an entity at will. LLC subject to dissolution due to debt, are required to liquidate assets, followed by official termination of all business activity.
"Cancellation" is the process of dissolving or ending the existence of a Limited Liability Company. Articles of Cancellation is required to be filed with the Secretary of State in the jurisdiction where the business is maintained, in order to cancel or dissolve a Limited Liability Company.
Corporation or LLC action
While Corporations have the shareholders approve the action of dissolution, LLCs have the members grant the approval. Bylaws that govern corporations and limited liability companies have an operations contract which outlines the cancellation process and need to be approved by the shareholders or members.
Corporation formalities requires the board of directors to draft and approve the resolution for dissolution which needs to be strictly adhered to while Limited Liability Companies aren't required to do the same, approval from all members should still be considered. The voting process must be carefully recorded and documented in detail within the corporate log book.
For Voluntary Dissolution of a LLC, Articles of Dissolution or Cancellation with the state agency that help 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.
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.
Withdrawal in Foreign States
If a LLC is formed in one state (formation state) but also registered for foreign authority in another state, and the LLC dissolves in the formation state, it must also withdraw its foreign authority in the other state(s).
Each State is Different
Each state's requirements are different, you should investigate your formation state's requirements for dissolution before final decision. Research the process for dissolution by going to a state research portal to find your state's website location for more details.
Who to Notify
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 official notice.
If you have obtained an Employer Identification Number (EIN) and you have previously filed a tax return for payroll activities. Tax-exempt LLC file a Form 1065 for informational purposes only. All business income is reported by the owner(s) in an individual Form 1040 and Schedule SE after it has “passed through” to them from the LLC entity. Send a letter to the IRS on the company's stationary, and listing the Limited Liability Company's Employer Identification Number (EIN), stating that the company is dissolved and no longer conducting business.
Other State Agencies
The Secretary of State is typically the state agency responsible for official registration of a LLC. Notice of the Department of Revenue or franchise tax agency is usually required.
If an LLC's registered agent, is not the owner, contact the preparer about the dissolution.
Contact vendors of the LLC about the dissolution. Do this in writing, or as requested by your agent.
Dissolution resolution, Articles of dissolution, and IRS form 966 are required to cancel a LLC.
Tips & Warnings
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 set forth in the LLC's bylaws to begin dissolution.
Some LLC require votes representing 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
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 dispense 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 are able to 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.
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