How to Close an LLC after Bankruptcy

It’s never a happy day when a business has to declare bankruptcy — but it’s not terribly uncommon. And for some entrepreneurs, declaring LLC bankruptcy can actually be a constructive way to get relief from debts and start fresh.

But exactly what are your bankruptcy options for a limited liability company? And how do you wrap things up after declaring bankruptcy? In this guide, we’ll walk you through the basics of dissolving an LLC after bankruptcy so you can smoothly move on to whatever’s next.

Bankruptcy Options for LLCs

The two most common bankruptcy options for LLCs include Chapter 7 bankruptcy and Chapter 11 bankruptcy. Of the two, Chapter 7 is a bit simpler — and more final. Under Chapter 7, the court appoints a bankruptcy trustee to handle the case. The trustee then handles the liquidation of the LLC’s assets, using the money from the sales to pay back some or all of the business debts. After the assets are liquidated, the business ceases to exist.

A Chapter 11 bankruptcy petition works a bit differently, as the LLC owner stays in possession of their business, and the business stays open. Instead of liquidating everything, a plan to reorganize the business is created. Creditors get to vote on the plan. If it’s approved, the LLC can get some relief from its debts but still stay open. Likely, you’ll repay your debts over a different period of time than the original plan.

If you pursue Chapter 11 bankruptcy, you won’t have to dissolve your LLC. But if you use Chapter 7 bankruptcy you’ll have to dissolve your business. Small businesses sometimes have a few different bankruptcy options under Chapter 11. If you’re not sure how this process will work, we recommend consulting with a bankruptcy attorney for advice.

Note: keep in mind that the Chapter 13 bankruptcy code is reserved for personal bankruptcy. While sole proprietorships and partnerships might pursue it, Chapter 13 is not an option for LLCs.

Reasons to Dissolve Your LLC after Bankruptcy

Even though bankruptcy effectively stops your business, it doesn’t actually stop your LLC from existing as a legal entity. Unless you formally dissolve your LLC with your state, you’ll still have an LLC on the record. Dissolution is the process that officially shuts down your LLC and takes it off the state record.

As long as your LLC still exists, you can incur ongoing tax liabilities (including expectations to file income tax returns and state franchise taxes), annual report fees, and more. You will have to dissolve your LLC to avoid those fees. Filing for dissolution also notifies any remaining creditors that your business has closed and can’t pay any more debts.

How to Dissolve an LLC

Every state has slightly different procedures for dissolving an LLC, but the general process is the same. You can find a full walkthrough of the process in our dissolution guide, but here’s a general look at the process:

1. Consult your operating agreement for how the process must flow.
2. Have your members vote to approve the dissolution.
3. Notify any remaining creditors that you’re dissolving (if the bankruptcy process was completed, it’s likely you’ll only handle unknown creditors).
4. Get tax clearance and pay any outstanding taxes.
5. File dissolution documents (usually called the Articles of Dissolution).
6. Cancel any foreign registrations.
7. Cancel any business licenses.
8. Liquidate any remaining assets to pay any additional debts and distribute what’s left to your members.

If you’re dissolving because of business bankruptcy, these steps might vary a little bit. But that’s a quick glimpse at the process.

Additional Steps for Closing Your Business

In addition to paying any remaining taxes, the IRS advises you to also take care of the following:

• If you have employees, you need to pay them any wages they’re still owed and pay any associated employment taxes. If you provided them with a pension or benefit plan, you’ll need to terminate those, as well. The IRS website has instructions for terminating a retirement plan.
• If you had any contractors that you paid at least $600 for services (including parts and materials) during the calendar year when you closed the business, you have to report those payments using Form 1099-NEC, Nonemployee Compensation.
• If your LLC has an employer identification number (EIN), you’ll need to close your IRS business account by sending them a letter with the complete legal name of the business, the EIN, the business address, and your reason for closing the account.
• Hang on to your business records. This includes property records and employment tax records.