Only 4 out of 100 businesses survive past the 10-year mark. This is due to a number of reasons: financial loss, retirement, or the need an LLC was created to address, no longer being a need. Whatever the reason, knowing how to dissolve an LLC is extremely important.
So, how do you dissolve an LLC? Each state varies slightly but the general procedure is basically the same. In this blog post, we’ll walk you through how to cancel LLC entities the right way, so it can be done as quickly and painlessly as possible.
Why Should You Formally Dissolve an LLC?
If you’ve asked yourself “how do I dissolve an LLC?” and then wondered why you can’t just close up shop and be done with it, here’s why: Going through a formal dissolution process gives your creditors notice that your LLC can no longer take on debts. It also means you’ll be much less likely to be hit with a lawsuit for an unpaid debt or a fee or fine from a government agency in the future.
Before we walk you through how to dissolve an LLC, you must first know the three different types of dissolutions to see which your LLC falls into:
Business owners choose to dissolve LLC entities via judicial dissolution for various reasons. The main reason is when the partners are not on speaking terms and have ceased to cooperate in operating the business. As a result, one partner may elect to dissolve the business. Judicial dissolution is an effective remedy when the partners cannot reach agreement.
Imposed by the Secretary of State’s office, administrative dissolution is brought on by the entity’s failure to comply with certain obligations of the business entity statute. During this process, the state administrator takes away the rights, powers and authority of a corporation, LLC or other business entity.
As the name suggests, voluntary dissolution is the result of members voluntarily agreeing to close up shop. This can be done by either the members casting a vote or by following certain “dissolution triggers”, like the death of a member. These triggers are usually written in the LLC operating agreement.
How to Dissolve an LLC
Now that we know the three different types of dissolutions, lets take a closer look at how to close an LLC.
File Articles of Dissolution
In the same way that LLC documents were filed with the state during the formation of your business, Articles of Dissolution (or a Certificate of Dissolution, in some states) must be filed with the Secretary of State to dissolve your LLC. Once approved, your company is technically dissolved, but dissolution itself is not the final step.
Before dissolution can take place, you must take care of your LLC’s remaining financial obligations. This means notifying your creditors you are going out of business. Some states require you to do this before filing dissolution papers. But even if your state does not require this, it’s a good business practice.
Notifying Landlord and Taxing and Licensing Authorities
You need to also contact any agency that issued you a license and pay any outstanding fees. Next, notify you state and local taxing authorities and determine whether your LLC owes any taxes.
Lastly, if you ran a brick and mortar business, you must contact the property owner. You’ll probably have to pay out the remainder of your contract, but a different arrangement could be made if the landlord is willing to work with you.
Distributing Assets to Members
This step will require you to revisit the ownership percentages detailed in the operating agreement. For example, let’s say it’s just you and one other member and you have agreed on a 60-40 ownership percentage split. Well, then assets would normally be distributed in the same percentages.
Take Care of Your Employees
If you have one or more employees, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. You must also provide a Form W-2, Wage and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages.
Lastly, if you provide a pension or benefit plan for your employees, see how to Terminate a Retirement Plan. If you provide Health Savings Accounts or similar programs for your employees, see About Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
How Long does it Take to Dissolve a Business?
Now that you know how to cancel an LLC, the question remains, how long does the process take? Generally it takes between 90 and 180 days from the date you filed your Articles of Dissolution.
The time it will take to physically close up shop is based on how long it takes for you to handle the above steps.
Whatever the reasons for closing your doors, understanding how to dissolve a business is important. It will prevent you from compounding the stress of an already stressful situation.