How to Dissolve an LLC

To close a limited liability company (LLC) the owners (also known as members) dissolve the business by notifying the appropriate government agencies, and wind up the business affairs by settling debts and distributing any remaining assets to the owners. The precise steps for closing your LLC depends on the laws of your state, as well as your company's operating agreement. If you do not have an operating agreement, or if the agreement is silent on certain procedures, you will follow the default rules provided by your state's statutes.

Types of LLC Dissolutions

Either the government or the LLC owners can initiate a dissolution. The law recognizes three ways to terminate an LLC:

Voluntary dissolution. A voluntary dissolution happens when the members decide to close the business. In their operating agreement, the members might have agreed to end the LLC on a specified date, or after a certain event occurs. Alternatively, the members may vote to close the business at any time.

Judicial dissolution. Judicial dissolution occurs when a court terminates the business. While uncommon, judicial dissolution can occur when a court finds that the owners formed an LLC for an illegal or fraudulent purpose, such as creating an LLC to hide assets from creditors.

Administrative dissolution. LLC members have a number of administrative responsibilities, such as paying taxes and filing annual reports. If the members fail to comply, the state may administratively dissolve the company. Members might have the option to address the problem, such as by filing a late annual report, in hopes of reinstating the LLC. After a specified period of noncompliance, the state might permanently dissolve the company.

How to Vote to Voluntarily Dissolve the Company

Often, the members' first step to terminate their LLC is to vote to dissolve the company. If your company wants to take this route, review your operating agreement. The agreement might specify whether dissolution requires a unanimous vote, or if you can dissolve with a simple majority. If the agreement is silent on the issue, your state's statutes will provide the default rules. Document the vote with either a recorded resolution or a written consent form, dated and signed by all of the members, and maintain the document for the company's records.

Notify Employees and Settle Claims with Creditors

Once you know the LLC is closing, notify your employees and pay final wages. Contact your creditors, such as your bank, vendors, property managers, utility companies, and other service providers. Pay any outstanding company debt and notify the creditors that your business is closing and that they have a deadline to submit any claims. (State law will provide the deadline for claim submission, such as 90 to 180 days from the date you send the notification.) Some states require LLC owners to publish a dissolution notice in a local newspaper.

After the deadline, creditors can no longer collect debt from the LLC, absent owner wrongdoing. A creditor can demand payment and bring a lawsuit at a later date, but the company will owe the creditor only if the LLC owners knew about the debt and did not pay it, or the owners failed to follow the state's notification requirements. In cases where the owners were in the wrong, they might be personally liable up to the amount the LLC distributed to them during the dissolution process. With limited liability protection, they will not be personally liable for anything above those distributions (unless they made a personal guarantee or a court pierces the corporate veil – which you can read more about here).

File Dissolution Paperwork

Similar to the formation paperwork that you filed when you created your LLC, you must file paperwork to dissolve the company in every state where you registered your business. Your state may refer to this as the Articles of Dissolution or the Certificate of Dissolution. In many states, this filing is free, but other states charge a fee to dissolve.

If you fail to file dissolution paperwork, the business is still legally open, and the company will continue to be responsible for annual fees and taxes. The LLC will have to pay those fees and taxes before you can distribute the remaining assets to the members. The timing of when you file will differ by state. Some states require you first to obtain clearance from tax agencies before you can file the dissolution paperwork, while other states have you file the dissolution paperwork first.

Notify Licensing and Tax Authorities

Cancel any business licenses and permits with the issuing government agencies. This will ensure that no one else can use the licenses, and that the business will not be responsible for any additional fees or penalties.

Pay all outstanding tax debt, including payroll taxes, and file your final tax returns. A final return is the same as your annual tax returns, except that you will mark the return as final in the appropriate space. Some states require you to notify their tax agencies that you are closing your business, similar to filing dissolution paperwork with the Secretary of State. Your state might require that you request a tax clearance from the state taxing agency, which you'll include with your dissolution paperwork, which will verify that the LLC does not owe any taxes.

Distribute Assets

Once you have paid all outstanding debts, you can distribute any remaining assets to the members. Assets include everything the business owns, such as cash, personal property, real estate, investments, and intellectual property like copyrighted materials. Consult your operating agreement to determine how you should distribute the assets. If your agreement does not address distribution, your state law likely provides the default rules, such as distributing property in the same proportion as the members' ownership interest. For property that you cannot easily divide, like real estate, you might sell the property and split the proceeds.