In most cases, limited liability companies (LLCs) are created with the idea that they will exist for an unlimited time. However, things do not always go as planned. Sometimes, a company may have to close down.
There are various reasons to close an LLC. While economic failure may play a huge role, it is not always the case. Business owners may choose to voluntarily dissolve an LLC.
What Is LLC Dissolution
Closing the shop or office may technically end the operations of a business. However, it does not formally terminate its existence.
That is where dissolution comes in. There are two major types of dissolution: involuntary and voluntary.
Involuntary dissolution is when a court judicially closes a business due to non-compliance with state laws or failure to pay all taxes. It may also be a result of a lawsuit. Another possibility is administrative action. That is when the Secretary of State or another state governing agency dissolves the company due to non-compliance with state law or failure to file required annual or biennial reports.
The other type is voluntary dissolution. It happens when the LLC members decide to close the business.
Top 3 Reasons for Voluntary Dissolution
So why would business owners decide to dissolve an LLC?
There are different reasons. Usually, certain events will trigger the closure of a company. Here are some of the most common reasons:
- Financial Problems
Money plays a huge role in running a business. There will be expenses that need to be covered. That is why it is important to ensure enough cash flow.
Knowing how much funds are available will help a company come up with better plans and make smarter decisions. Proper management of cash flow also allows the LLC to keep track of how it spends money.
Having problems with cash flow does not only affect business operations; it may also damage business relationships. With no funds available, a company may not be able to pay suppliers and might end up incurring debts.
While an LLC does not have to impose the same formalities that corporations need to follow, it still has to keep track of its finances through proper accounting of payments and expenses. Having an accounting system or hiring an accountant may help ensure that all financial documents are in order. This way, it will be easier for the company to realize if something is wrong.
- Bad Management Practices
Business owners who have little or no vision at all for growth will put the company at risk. At the same time, having a solid plan on how to achieve the goals of the LLC is just as important.
Aside from those, a business owner will have to know how to handle a team and lead them toward the right path. However, a lot of people enter entrepreneurship with no experience or knowledge of how to manage a company. It is necessary to learn that so you can properly handle the multiple responsibilities that come with business ownership, such as finance, human resources, sales, marketing, purchasing, and production. If learning those matters seems a bit much, hiring experts to handle them may help.
- Internal Conflict
Having opposing opinions is always a possibility when a business has co-owners. However, if the disagreement turns into a big deal that cannot be resolved, LLC members may end up choosing to dissolve the company and go their separate ways. After all, ongoing conflict can also take a toll on the business income at a certain point.
Common disagreements among LLC members usually have to do with the distribution of profits and losses and what types of business opportunities the company should pursue. The best way to prevent this from happening is to have a clear and well-detailed operating agreement outlining the duties, responsibilities, rights, and powers of each member. It should also clarify how profits and losses will be divided.
Dissolve an LLC
If the best course of action would be dissolution, then an LLC should make sure it follows the process the state has set. The requirements and fees may vary depending on where the company is registered.
Here are some of the common steps an LLC needs to take:
- Vote to dissolve following the company’s operating agreement or state laws.
- Submit formal paperwork and pay the filing fee.
- Cancel all registrations and licenses.
- Get a tax clearance if necessary.
- Wind up the business.
To find out more about the dissolution process in each state or get help in handling the whole ordeal, contact our team of experts at DoMyLLC.