When you started your limited liability company (LLC), the last thing you probably had on your mind was ending it. Many LLCs are created for specific purposes, however, and when that purpose has been served, its members may think about winding up the company. LLCs may also terminate due to member retirement, conflict, or death; state administrative or judicial orders; failure of the business; or other reasons.
Regardless of the reason for terminating an LLC, there are procedures that must be followed to legally end it. If an LLC is not properly terminated, it continues to exist as a legal entity that is obligated to pay taxes and fees and file annual reports. In addition, it may be sued and could be vulnerable to identity theft.
Ways an LLC Can Be Dissolved
Creating an LLC involves filing paperwork with the state and forming a legal entity that is separate from its members. Dissolution refers to the first step in the process of terminating an LLC as a separate legal entity.
Dissolutions fall into three general categories: voluntary, administrative, and judicial.
- Voluntary dissolution occurs when the LLC’s members choose to close the business. This may happen due to a “triggering event” listed in the operating agreement, such as the fulfillment of the LLC’s founding purpose or the death of a member. The triggering event could also be a vote of the LLC’s members in favor of dissolution. A dissolution by vote may need to comply with procedures outlined in the operating agreement. These formalities may include providing notice, holding a meeting, and obtaining the number or percentage of votes required for dissolution. When voluntary dissolution is not addressed in the operating agreement, the default provisions in the state LLC law must be followed.
- Administrative dissolution occurs when the state where the LLC was formed imposes its dissolution. The state agency responsible for LLC formation, typically the secretary of state, is also empowered to dissolve it under certain circumstances specified by state law. Common statutory reasons for administrative dissolution are failure to pay taxes or fees, file an annual report, or have a registered agent for a specific time period.
- Judicial dissolution is done via court order in accordance with state law specifying when the conditions under which dissolution are appropriate. For example, Delaware law states that the Court of Chancery may dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” Similarly, in New York, the court may dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” Judicial dissolution is uncommon and usually ordered to resolve litigation brought by a disgruntled LLC member.
Steps to Dissolve and Wind Up an LLC
As mentioned, dissolving an LLC is just the first step in terminating the business. After dissolution, the LLC must take additional steps before it is formally ended. This is known as “winding up” the LLC.
Here are the steps to follow to legally terminate an LLC:
- File dissolution paperwork. Starting—and ending—an LLC begins with filing state documentation. Dissolution at the state level requires the LLC to file a document called Articles of Dissolution, Certificate of Dissolution, Statement of Dissolution, or something similar. This form is typically filed with the same state agency where the original LLC formation documents were filed. Some states may have additional LLC dissolution requirements, such as obtaining tax clearance and settlement of creditors’ claims. LLCs that conduct business in more than one state must file dissolution paperwork in those states as well. Once the dissolution documents are filed, the LLC is legally considered dissolved.
- Wind up the LLC. Once the LLC is dissolved, it must then wind up its affairs. State LLC statutes describe the steps necessary to complete the winding up process, which typically include the following:
- Notifying creditors and clients
- Settling creditor claims
- Canceling business licenses and permits
- Ending contracts and leases
- Filing final income tax returns and paying all taxes owed
- Paying final payroll taxes
- Closing business bank accounts, credit lines, and taxpayer accounts
- Liquidating and distributing remaining company assets to members
- Taking care of employees (paying final payroll taxes, settling severance packages, etc.)
- Withdraw business registrations in other states
Again, some of these steps (e.g., paying debts and liabilities and distributing assets) may be required as part of the dissolution filing. And there may be obligations at the federal as well as the state level.
- The Internal Revenue Service (IRS) has a Closing Business Checklist that details the filing requirements for LLCs. It notes that the type of final tax return an LLC must file is based on how it is classified for federal income tax purposes (i.e., as a partnership, a corporation, or an entity disregarded as separate from its owner).
- The IRS provides specific forms for paying employment taxes and reporting payments to contract workers.
- The IRS has additional requirements for terminating employee pension, benefit, and health savings accounts or similar programs.
Closing a Business Is a Lot of Work. We Can Help.
Ending your LLC can take as much effort as starting it. But failing to legally dissolve and wind up the business can have serious repercussions. These risks can be avoided by terminating your LLC in accordance with the law. To make sure your LLC complies with every legal requirement, consider consulting our small business attorneys. We can help you ensure that all the necessary steps are taken to legally end your LLC.
