Closing a business can be an agonizing experience for entrepreneurs. That is especially true if the company has not even reached its first anniversary. Business owners invest money, time, and effort into a company, so deciding to shut down the operations can be hard. However, knowing when it is time to dissolve is part of entrepreneurship. It is also necessary to properly close down the business to prevent any issues.
Reasons For Closing An LLC
Before learning how do I dissolve my LLC, it is best to understand first when it is necessary. In some cases, the dissolution is not the owner’s free will. External factors such as economic issues, legal circumstances, and personal conditions can lead to the closure of a business. Here are some of the common reasons for closing a company:
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- Bankruptcy
- Defective products
- Failure in succession planning
- Low cash flow
- Member disagreements
- Mismanagement
- Negligent accounting practices
Sometimes, LLC members decide to dissolve the company because they think a different legal entity structure is more suitable for the goals and objectives of the enterprise. Others decide to do it because they think the LLC has to go in a different direction, such as a change in the business purpose.
The Importance Of Dissolution
When an LLC was formed, the company had to file documents with the state. Doing so formalized the business registration and legalized the LLC’s operations in the state. So unless a company informs the state that it is no longer doing business, authorities will presume they are still in existence. Because of that, they will continue to expect the filing of reports and payment of tax obligations.
By properly dissolving an LLC, the owner lets the state know that they are no longer running a legal business entity. That means they will no longer be expected to pay any fees or taxes and file certain reports.
How Do I Dissolve My LLC?
The Internal Revenue Service (IRS) describes an LLC as a business entity structure that is allowed to operate under state statutes. So aside from liquidating, selling assets, and informing clients about the closure of the business, an LLC will have to comply with the requirements of the state where it was formed. The process will vary depending on the state.
Some states allow the cancellation of the LLC using a Short Form Certificate of Cancellation or a similar form if it is less than a year old. There may also be additional requirements. For instance, California allows this filing for an LLC less than a year old if it also complies with the following:
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- The LLC does not have any debts or liabilities other than tax liability.
- All known assets of the company have been distributed to the people entitled to them or that there are no known assets acquired.
- The final tax return of the company has been filed.
- The company has not conducted business from the filing of the formation documents.
- Majority or all members agree to the business cancellation.
- The LLC returns any payments for interests to investors.
States may have different requirements from the ones mentioned. Check with the governing agency to prevent any issues.
Other states may not offer a short form cancellation. In that case, the only option for an LLC is dissolution. Like with other processes, dissolving an LLC also depends on state laws. However, there are some general steps that companies have to take, no matter where they choose to operate. Here is a simple guide to follow:
Step 1: The LLC members will take action.
The members have to grant the dissolution of the company to make sure that everyone is on the same page. The process involved is not as strict as the one that corporations have to follow.
The LLC members will vote to close the company. The procedure and the necessary number of votes may be in the operating agreement of the LLC, so it is best to check for provisions in that document. In cases where there is no specific provision in the LLC’s operating agreement, the company will follow the voting requirements that the state law describes.
After taking a vote, the company has to maintain a written record of the resolution to dissolve the company.
Step 2: Fill out and submit formal paperwork.
To formalize the closure of the business, the company has to file paperwork with the state where it is registered. The form is usually called the Certificate or Articles of Dissolution.
The time to file the paperwork also depends on the state where the business is located. Some may require the filing before the notification of creditors and resolution of claims. Others want the submission of the document after informing creditors and settling claims. Some states require the company to obtain a tax clearance first.
Make sure to file the document with the Secretary of State or other government agency in the state where the company was formed. In accomplishing the form, the company may have to disclose the name of the LLC, the active date of dissolution, and the reason for closing the business among others. In most states, there is a readily available form that can be downloaded. It also comes with a filing fee.
Step 3: File tax forms.
LLCs have tax obligations. They have to close their tax accounts so they no longer have to file taxes and deal with other reporting obligations.
At the federal level, the company has to submit a final tax return. This can be done by stating in the IRS form that it will be their final federal tax return. As for state taxes, make sure that all obligations are settled. Check with the governing agency, which is usually the Department of Revenue or Taxation.
Step 4: Notify creditors about the business closure.
Informing creditors about the dissolution allows you to avoid any issues. Here are some of the things you need to keep in mind:
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- Explain that the LLC has the intention to dissolve or has already been dissolved.
- Include the address where the creditors have to send claims.
- List all the pieces of information that they have to include in a claim.
- Inform them about the deadline for submitting claims, which is usually 120 days after the date of the notice.
- Explain that the company will no longer accept claims after the deadline.
Step 5: Settle all claims.
After receiving claims from creditors, the LLC has to pay or come to an agreement with creditors regarding the repayment of the said claims. In the case of claims rejection, the company has to inform the creditor about it in writing. It may help to get advice from a legal professional.
Step 6: Distribute assets.
The company may end up having leftover assets. In that kind of situation, the LLC has to distribute those to the owners depending on ownership interests.
If the company is registered in multiple states, then it has to file dissolution paperwork in all of them to withdraw the right to do business. Check the process on how do I dissolve my LLC in all of those states to ensure compliance.
Closing an LLC can be difficult for any business owner. Fortunately, it is not something that one has to do alone. There are reliable third-party organizations like DoMyLLC that can assist with the process. Contact us today to learn more about the solutions we provide.
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