How to dissolve an LLC

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How to dissolve an LLC

Once a business owner decides to go out of business, they may not be enthusiastic about taking the time to wrap things up properly. But filing paperwork with the state and notifying creditors are important steps that will help limit their potential liability and allow them to move forward with the next phase of their career, LegalZoom explains.

What Does It Mean to Dissolve an LLC?

Dissolving an LLC removes the business entity's legal status with the state. This often occurs when the business owner decides they no longer want to continue operations and wish to end their entrepreneurial journey. It's a difficult call to make, but it doesn't necessarily mean that the business has failed. Dissolving a business is a natural part of a business entity's lifecycle.

Many small business owners opt for a dissolution of their LLC when:

Their business was always intended to be temporary.
Their business has met its financial goals or purpose.
They are struggling financially and can't find external funding.
They are retiring and have no successor.
They have an argument with members, and dissolving the business is the only viable solution.

It's important to properly dissolve an LLC because until the authorities are told otherwise, they will assume the business is active. As long as the LLC is active, the owner is required to file annual reports, pay annual fees, and pay minimum taxes. Formally dissolving an LLC puts an end to these requirements.

It also gives creditors notice that the LLC can no longer take on debt. Going through a formal dissolution process means business owners are much less likely to be surprised with a lawsuit for an unpaid debt or a fee or fine from a government agency in the future.

How to Dissolve an LLC: A Comprehensive Overview

When starting a business, you were probably excited about the new venture and made sure you did everything right—from making the decision to start a limited liability company to filing formation documents with the state. Similarly, dissolving an LLC entails a process.

Step 1: Decide to close your business

Dissolving an LLC starts with making the decision to close. For a single-member LLC, this decision is entirely yours. However, if there are multiple members, then all members must vote to dissolve the business entity. The voting process should be conducted as per the LLC's operating agreement. In lieu of an LLC operating agreement, the voting process should follow the formation state's LLC laws.

Step 2: Notify creditors and settle debts

Once you've made the decision to close an LLC, it's important to notify creditors that it is going out of business. In the notice, they should be informed on how to submit claims and the deadline for doing so.

Every state's LLC statutes will specify the deadline for submitting respective claims, but it is generally between 90 and 180 days from the date of the notice. The notice should also say that any claims received after the deadline will be barred.

Many states require business owners to notify creditors before filing dissolution papers. Even if it is not required, it is a good business practice. Notifying creditors helps owners take care of their LLC's remaining financial obligations before dissolution and limits the possibility of late fees or litigation over unpaid obligations.

Step 3: File final tax returns and get tax clearance

Contact federal, state, and local tax authorities to determine whether the LLC owes any taxes and how to file final returns. If the LLC owes taxes, pay them to be able to receive a "consent to dissolution" or tax clearance certificate from the necessary authorities, such as the state tax department. In some states, clearances from the state tax department have to be submitted alongside dissolution papers.

In the final tax returns, indicate that this is the LLC's last return. This notation will help to avoid tax liabilities that could persist even after the business has ceased operations.

And in case the LLC has employees, don't forget payroll tax obligations. If this step is skipped, the IRS can seek restitution from business owners personally.

Step 4: Notify licensing authorities

Next, contact any federal, state, or local agencies from which you received licenses to cancel them and take care of any outstanding fees. Professional, trade, or general business licenses fall into this category.

For example, if an LLC holds a liquor license, business owners must inform the state department of its dissolution. Similarly, for businesses with a professional license (such as an architect or engineer) from a state-based board, ensure that the dissolution doesn't impact your professional license.

If an LLC has a DBA, cancel that, too. Check with the respective state or a business dissolution service to understand the process and fees.

Step 5: File dissolution papers

Just as business owners filed paperwork with the state to form their LLC, they must file articles of dissolution or a similar document to dissolve the LLC. This document is part of public records and informs the state of the intent to close.

These papers are filed with the same state agency that handled the original LLC formation—usually the Secretary of State. Forms, filing procedures, and fees vary from state to state.

In some states, owners must obtain a certification from the state taxing agency confirming that the LLC is current in all its state taxes, and you must file this with dissolution papers.

Step 6: Close business bank account

Next comes settling and closing all business-related bank accounts. Before the business bank account can be formally closed, ensure that all of the LLC's debts and outstanding checks have been cleared. Then gather any required documentation needed by the bank to close the account. This could include dissolution papers, a formal letter requesting account closure, and confirmation of the person authorized to close the account.

Step 7: Distribute remaining assets

After paying all of the LLC's outstanding financial obligations, distribute any remaining assets to the LLC's members. The LLC's assets are to be distributed to the members as per the operating agreement. For instance, the operating agreement may mandate that assets get distributed to the LLC members as per the percentage of their ownership in the LLC. Maintain accurate documentation of the asset distribution process, including the specific amount given to each member.

Each state's laws may have additional statutes governing an LLC's dissolution and asset distribution process. An accountant or tax adviser can help to navigate these.

Step 8: Cancel contracts and inform customers and employees

The final step involves canceling contracts, leases, and other agreements the LLC entered. If it had employees, they will need to be informed about their last day of employment and provide severance (if applicable).

Also, don't forget to inform customers about the dissolution. It's not a legal mandate, but it's nice to keep them informed. This also offers a way to get back in touch, just in case owners wish to reopen their business down the road.

How to Dissolve LLC in California

Dissolving an LLC, known as "legally canceling" in California, follows pretty much the standard steps listed above. However, depending on the decision to cancel the LLC, different forms are required.

If all members voted to dissolve the LLC, submit a certificate of cancellation.
If there was a majority vote or an event outlined in the operating agreement that triggered the dissolution, first file the certificate of dissolution.
If an LLC was formed less than 12 months ago, submit Form LLC-4/8—a short-form cancellation certificate.

California charges no fee for the dissolution or cancellation of an LLC if the filing is done online. However, if a paper form is submitted, the Golden State levies a $15 handling fee. Certified copies of dissolution documents cost an additional $5.

All forms must be submitted within 12 months of the LLC's last tax return. In the final taxes to the state, select the "Final Return" box.

Dissolving an LLC in Texas: Key Requirements

Before dissolving or terminating a Texas LLC, obtain a certificate of account status for dissolution/termination issued by the Texas comptroller. This document shows that the Texas LLC has paid all taxes under Title 2 of the Tax Code.

To request a certificate of account status, use form Form 05-359. Mail the form to: Comptroller of Public Accounts, P.O. Box 149348, Austin, TX 78714-9348.

File this certificate—and not a printout of the LLC's tax account status—alongside the completed certificate of termination with the Secretary of State to legally end the LLC's existence. The filing fee for dissolving an LLC is $40, and there is the option to file online via the state's online system, SOSDirect.

How to Dissolve LLC in Florida: A Simple Guide

To officially dissolve a Florida limited liability company, complete the articles of dissolution online with Florida's Division of Corporations. There is a $25 filing fee. The articles of dissolution include a cover letter that includes the name of the LLC, mailing address, and the name and telephone of the person authorized to dissolve the company.

The articles of dissolution require the reason for dissolution. This must be in line with the Florida Limited Liability Company Act. The dissolution packet also includes a notice of limited liability company dissolution. While this form is optional, it's helpful in informing creditors of the dissolution and gives them a deadline to submit claims.

A certified copy of articles of dissolution can be requested for $30 and a certificate of status that shows the LLC is no longer active can be requested for another $5.

Don't forget to complete other measures like paying final federal and state taxes, canceling licenses and contracts, and distributing any remaining assets as per the LLC's operating agreement.

State-Specific LLC Dissolution Processes

While most states follow the seven-step dissolution framework, there can be a few variations.

Arizona

Arizona state law mandates that an LLC undergo a formal vote to start the dissolution process. For a single-member LLC, the decision is yours. Next, notify creditors of the intent to dissolve and give them a time frame to bring up claims. The LLC's books must be settled—meaning all debts and taxes owed must be paid, and all remaining assets must be distributed—before filing the articles of termination.

For those with an Arizona Transaction Privilege Tax (TPT) license, this must be canceled as well. Mailing a final transaction privilege tax return with the Arizona Department of Revenue will cancel this tax license. It can also be canceled online through AZTaxes.gov by logging in to the business account page, going to the Account Update option, and selecting "close account."

Delaware

In Delaware, LLCs are "canceled" through a certificate of cancellation. Before filing a certificate with the state, settle unpaid debts and payments, cancel the necessary contracts, inform employees, resolve any pending legal issues, and pay the state franchise tax.

For an LLC in Delaware, the state franchise tax is $300 and is due before June 1 of each year. Failure to file the final franchise tax can result in a $200 fine plus a 1.5% monthly interest penalty.

The completed certificate of cancellation can be filed online through the state's business filing portal. There's a $220 cancellation fee. Those who choose to mail their certificate of cancellation will need to include a cover letter and a check for $520 ($220 cancellation fee + $300 franchise tax).

Michigan

In Michigan, all the LLC members have to agree to the dissolution. After this, the certificate of dissolution, with a $20 payment, can be filed with the Michigan Department of Licensing and Regulatory Affairs Corporations, Securities & Commercial Licensing Bureau Corporations Division. There's an online filing option through the Corporations Online Filing System (COFS).

Business owners must also obtain a tax clearance certificate from the Michigan Department of Treasury. This step must be done within 60 days of submitting dissolution paperwork as it verifies that all state taxes have been paid.

After receiving the tax clearance certificate, complete the notice of change of discontinuance form. This can be done online, and there's no filing fee.

New Jersey

The process to dissolve a NJ LLC involves the following steps:

Ensure annual reports are current. If not, update the report and pay the fee through the online annual report portal.
File certificate of cancellation online or via mail.
Cancel tax and employer registrations with the Department of Treasury's Division of Revenue and Enterprise Services.

Owners must also proactively cancel other licenses and permits. For instance, if a New Jersey LLC operates under a trade name or DBA, a Statement of Abandonment of Use may need to be submitted to the local County Clerk.

Common Mistakes to Avoid While Dissolving an LLC

Regardless of the state in which a business is being dissolved, a few missteps to avoid are:

Failing to inform creditors
Not paying final taxes, including payroll taxes (if applicable)
Forgetting to file articles of dissolution with the state
Not canceling permits and licenses
Not distributing assets
Failing to maintain proper records

A legal adviser or business service provider can help to complete each step, ensuring owners are well-set for the next step of their business journey.

What Happens After an LLC Is Dissolved?

Dissolution ends the LLC's legal entity status with the state. Owners can't engage in any business transactions as an LLC from this point onwards. There also could be a few more loose ends that need winding up.

Those who registered their LLC to do business in other states must file documents with those states to withdraw or cancel their right to do business in those states. If they neglect to do this, they could remain liable for annual reports, fees, and minimum taxes, even if they haven't done any business.

They will also be responsible for filing the LLC's final income tax return and, if applicable, final employment tax returns. The Internal Revenue Service has a checklist of tax-related actions you typically need to take when closing a business.

Remember to keep records of all dissolution paperwork, including a filed certificate of dissolution and tax returns. The IRS requires owners to hold on to LLC records for anywhere between three to seven years post-dissolution.

FAQs

How much does it cost to dissolve an LLC?

The fees for dissolution vary by state, ranging from $0 to $200. California, Connecticut, Georgia, Maryland, and Utah are a few states that have no fees for dissolving an LLC. Alabama has a $100 fee for processing LLC dissolution. The state of Delaware has the highest fee of $200.

What happens if I don't dissolve my LLC properly?

Failure to formally dissolve your LLC can result in fees, debts, and accrued taxes. It can also leave you open to legal trouble like a customer suing the LLC and coming after your personal assets to cover damages. Also, unpaid LLC debts can tarnish your personal credit score. And loose ends in dissolution can prevent you from reinstating your business—which may be something you wish to do in the future.

Can I dissolve my LLC online?

Yes, many states allow you to file the certificate of dissolution or termination online. Your state's Secretary of State website or a business dissolution service, like LegalZoom, will have information about online filing options.

What is the difference between voluntary and involuntary LLC dissolution?

A voluntary dissolution means that members, through a majority or unanimous vote, willingly decide to close the business. The reasons to dissolve could be that the LLC has met its goals, the LLC is merging with another company, or the members have decided to part ways.

An involuntary or judicial dissolution is a court-ordered dissolution. Reasons for court-ordered dissolution could include failure to maintain compliance as per state laws, fraudulent activity like money laundering, unresolvable differences between members that can't be resolved, or lawsuits that lead to insolvency.

Do I need to cancel my EIN after it's dissolved?

An EIN can't be canceled. However, you can deactivate your business account by sending a legal letter to the IRS. The letter should include your LLC's legal name, business address, and reason for closing the account.