A Guide to Dissolving an LLC

Dissolving an LLC is a somewhat complicated process, but if you follow the right steps, it can be manageable. In this guide, we’ll discuss why dissolution is important. We’ll also cover the 10 basic steps you can take if it’s time to close your business.

What does it mean to dissolve an LLC?

“Dissolving an LLC” is just the legal term for closing a limited liability company. When an LLC files for dissolution by submitting paperwork with its state, the business’s legal structure disappears completely. It “dissolves,” and the entity no longer exists. 

After a business dissolves, it can’t conduct normal business. It can only operate in ways that are necessary to “wind up,” or close up shop by fulfilling its final responsibilities.

Other Types of Dissolution

Please note that in this guide, we’re discussing the voluntary dissolution process, which differs from two types of involuntary dissolution: administrative and judicial. Administrative dissolution is when the Secretary of State forces a business entity to dissolve (usually for noncompliance).

Judicial dissolution occurs when a court rules that an LLC must close. Often, in one of these dissolutions, the court governs how the wind-up process goes and how any assets are distributed.

Why is it important to dissolve your LLC?

Dissolving your LLC is essential to protect yourself from extra fees and legal penalties down the road. For starters, you’ll want to avoid fees for annual paperwork. Your state will continue to require an annual report (or biennial report or periodic report) every year or however often it’s required, regardless of whether you’ve actively run your business or not. You’d also be subject to ongoing business license fees and other requirements. Even after just a couple years (plus late fees), the expenses can really add up.

Additionally, you must notify your creditors if you’re being sued that you’re going to close up shop. If you fail to properly notify them, you greatly increase the potential liability that they can sue you personally. Hopefully, when you notify your creditors, you can arrange a settlement or payment plan for your outstanding debts (more on this later).

Ultimately, formally filing for dissolution can protect your long-term finances.

How to Close an LLC

Dissolving an LLC looks slightly different from one state to another, but the basic process stays the same. Follow these 10 steps to close your business, and you’ll be on your way to whatever is next for you — without any future hassle.

Step 1: Consult your LLC’s operating agreement

Check out the terms of your LLC operating agreement. Typically, when an LLC starts out, it drafts an operating agreement that governs exactly how the business will function. The operating agreement should include provisions for how the LLC can close up shop. For example, an LLC might decide that a simple majority of members can vote to dissolve. Another LLC might require unanimous consent to dissolve.

It’s important to follow your operating agreement when starting out the dissolution process. If your LLC doesn’t have an operating agreement or doesn’t contain a provision for dissolution, your dissolution will be completely governed by your state’s LLC statutes.

Step 2: Take a vote among the LLC members

Have a formal member meeting where you vote on the motion to dissolve. Your members will need to vote for or against the dissolution. Typically, LLCs hold a member meeting dedicated specifically to voting. If your operating agreement or state statutes have requirements for a voting quorum (what percentage of members must be present for a legitimate vote), be sure to meet those.

If your members agree to dissolve, you can proceed with the rest of the dissolution process. If not, you’ll have to collaborate on another course of action.

Step 3: Notify creditors of the dissolution

Send a formal written notice to your creditors that your LLC will be dissolving. If your LLC has any outstanding debts, then your creditors have a right to make a claim to what’s due them. But you’re required to notify them that you’re dissolving in writing. This written notice should include:

• A statement that you’ve voted to dissolve your business entity
• When the dissolution will occur
• How long they have to come forward and make a claim
• Where to send those claims

You actually get to set out how long your creditors have to make a claim, as long as it meets your state’s minimum. 120 days is a common requirement, but you’ll have to check your state’s dissolution statutes to learn your exact requirements. If a creditor doesn’t make a claim within that window, their claim is barred. 

Managing Claims from Unknown Creditors

It’s not unheard of for LLCs to have claims against their business that they don’t know about. Those creditors can still stake a claim, so it’s often a good idea to notify them as well. To do so, you can place a notice in a local newspaper that you’re closing your business. Generally, this notice should include how to make a claim, and how long creditors have to make their claim.

State statutes surrounding these notices vary, including the minimum time window you need to give unknown creditors. Some states require this step, and in other states, it’s optional. You should consult your state’s unique statutes to know for sure.

Step 4: Notify tax agencies

Alert the IRS and your state’s revenue department that you’re dissolving. You’ll need to notify all applicable tax agencies that you’re closing your LLC. Inquire about any outstanding tax liabilities you have, and pay those taxes if necessary.

Of course, these tax liabilities matter on both the state and federal levels, but they can be especially important on the state level. Many states require you to get a “Certificate of Tax Clearance” or similar document before you file dissolution paperwork. Even if your state doesn’t require this certificate to file your paperwork, you’ll have to fulfill your tax obligations later, anyway.

Step 5: Obtain all necessary LLC dissolution forms

Gather the dissolution paperwork you’ll need. The exact form you’ll need varies from one state to another. Most states call this form the “Certificate of Dissolution” or the “Articles of Dissolution.” This form usually requires some basic information about your LLC. Some state forms require information about the vote to dissolve or additional documentation, such as a tax clearance letter.

These forms usually have a filing fee. Contact your Secretary of State to learn what fees you can expect, along with any extra forms you need to include with your articles.

Step 6: Cancel any out-of-state registrations

If you expanded your LLC into another state with a foreign qualification, you’ll need to cancel that. Like the Articles of Dissolution, the form for this varies by state. For example, South Carolina calls it the “Certificate of Cancellation of Authority to Transact Business,” but other states have other names. No matter what your state (or states) calls it, you’ll need to file this paperwork. Additionally, you’ll want to settle your tax burdens in that state.

Step 7: Cancel business licenses and permits

File forms to cancel licenses you hold with state and professional agencies. If you had to obtain any state (or local) business licenses or permits when you first started your business, you’ll need to cancel them. The same goes for any industry-specific licenses your LLC held. If you personally hold a professional license and want to maintain it, you can. Just be aware that you may be subject to automatic renewals for any licenses you don’t cancel.

Step 8: Liquidate your assets to pay outstanding debts

Fulfill your outstanding liabilities to satisfy your creditors. If your LLC has any debts, you’ll need to pay them. LLCs with cash on hand can pay these debts outright. But if you’re short on cash, you can liquidate the LLC’s assets to pay these debts.

If you’re dissolving your LLC because you’re in financial trouble, you might find that the liquidated assets fall short. In that case, filing for bankruptcy might be a viable option to repay your debts. This can be a complicated, time-consuming legal proceeding, though. We highly recommend consulting with a business bankruptcy attorney for assistance.

Step 9: Divide assets among LLC members

Distribute any remaining funds between your LLC members. If there’s any money left after paying your LLC’s debts, you can distribute those funds among your members. This is another step that should be governed by your operating agreement. Some LLCs might split the remaining assets equally, while other LLCs might distribute them in proportion to each member’s membership interest.

If your LLC doesn’t have an operating agreement, asset distribution will be governed by your state’s default LLC statutes.

Step 10: Take care of any remaining tasks

Finish up any outstanding responsibilities for your LLC. The above steps cover the common steps that apply to almost all LLC dissolutions. But it’s quite likely that you’ll have other little tasks to tackle. For example, if you have an office lease, you’ll need to terminate that. Similarly, if you hired any employees, you’ll need to pay their final paychecks and any severance benefits they’re due and complete your final employment tax returns.

If you opened a business bank account, you’ll want to close it and cancel any business credit cards and debit cards. You might also collect your business records and store them in a safe place just in case. These aren’t the only possible tasks you might have to tackle — each LLC is a little different. Be sure to take inventory of your business’s unique tasks and wrap them up.

We can help!

Maintaining a business or even closing one can feel overwhelming, but you don’t have to go it alone. Here at ZenBusiness, we can help you with red tape like creating an operating agreement or ongoing compliance. Even if you want to start fresh with a brand-new LLC, we’ve got your back.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.