LLC Liquidation: Everything You Need to Know
LLC liquidation refers to the process where an LLC's assets are liquidated in order to pay its creditors. 3 min read
What is LLC Liquidation?
LLC liquidation refers to the process where an LLC's assets are liquidated in order to pay its creditors. Before any of the remaining funds are distributed to LLC members based on how much of the LLC they own, the process of liquidation must be completed. Liquidating an LLC is a bit more complicated than just closing the company's doors. Each state has its own process for LLC liquidations, though many utilize a similar process.
Frequently Asked Questions About LLC Liquidation
What happens when you decide to close your LLC?
When an LLC is going to close, it must be liquidated. This means that your LLC will stop working and focus on settling all of its accounts with people that it owes money to. For the most part, your LLC will need to end any contracts that it has, get rid of all of its assets, and pay its debts. In most cases, liquidating a business means selling all of the assets and using the remaining funds to pay creditors.
How do you know what to do in an LLC liquidation?
Facilitating an LLC liquidation generally follows the rules that you established in the operating agreement for your LLC. If your operating agreement doesn't specify how liquidations will be handled, then you will default to the rules that your state established. These rules vary by state, and you can check with a lawyer or the appropriate government office for guidance.
What is the requirement for liquidating my LLC?
If you are looking to close your LLC, then all you need is a resolution to close it. Based on which state you operate in, you need to have all of the shareholders vote to close the LLC. Each state has different requirements including what percentage of the vote is needed to liquidate.
If the business is liquidated, how does it affect my taxes?
An LLC liquidation will have a special effect on your taxes, which is based on your recognized gain or losses. There is a process established for determining what counts as a gain or a loss. To determine if there was a gain or a loss for tax purposes, simply compile all of the payouts that you receive from the liquidation and group them by their gain or loss value. Then compare your overall gains against your overall losses.
In a liquidation, gains count as:
- Any cash payout has a higher value than what the original agreement for the LLC dictates. If the amount is higher than your distributee basis, then you count it as a gain.
- Any payout in the form of assets that can be redeemed for cash at some point can be counted as a gain if its monetary value is higher than your basis.
- Any asset payout that has a monetary value.
You count your losses as any of the above mentioned items that have a lower value than your basis. On your taxes, you will use this to determine what your taxes will be. If there is a gain, you will pay taxes on that income. If there is a loss, then your tax liability may decrease. If you cannot qualify anything as a gain or a loss, then your basis is used to determine your taxes.
Steps to LLC Liquidation
1. Before an LLC is liquidated and closed, it must first be dissolved.
- Often, LLCs are dissolved once a triggering event happens. This triggering event may be specified in the LLCs operating agreement or by vote of the members.
- Some operating agreements require a meeting to be held to vote on the closure of the business.
2. File a document notifying the state of LLC closure.
- Include the LLC's name, formation date, the triggering events, and that the LLC is dissolving.
3. Stop doing business as soon as the document becomes effective, as the LLC is considered dissolved.
4. Discharge any debts, obligations and liabilities for the LLC.
- This includes notifying creditors about the LLC dissolving, canceling business licenses, liquidating assets, and paying creditors.
5. Settling any outstanding LLC activities and affairs.
- This includes final tax returns and annual reports.
6. Distribute remaining assets to members by ownership percentage.
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