What is an LLC?
A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship
What is Dissolving an LLC?
Dissolution generally occurs when the business purpose of the LLC is completed or ceases to be economically viable. The members may also agree to dissolve the LLC if they are at an impasse regarding fundamental decisions concerning the LLC's business operations.
There are many steps to closing a business. Owners must take careful action to ensure proper compliance and protect themselves from future liabilities. Following the proper procedures can help you move forward as quickly as possible when winding down your business. This will ensure that you are no longer responsible for paying annual fees, filing annual reports, and paying business taxes. The following describes how to dissolve an LLC business structure. Actions to dissolution are state-specific, so make sure you look into your state's requirements.
What are some reasons for Dissolving an LLC?
There are several reasons for dissolving an LLC. This can include that the company is going out of business, is not paying their taxes or following state regulation. In some cases LLCs are created to fulfill a purpose. Once the goals are completed, there may be no reason to continue the LLC. Members may also get into disagreements about the direction of the business, what subsequent actions to take, or how to disburse profits. Therefore the members may elect to dissolve. Another reason is if a single person formed the LLC, the death or retirement of the individual may signal the end of the organization. Finally, if there are decreasing demand or liability concerns for the products sold, you may elect to dissolve the business as running the company no longer becomes profitable.
How to dissolve an LLC?
There are some basic steps to dissolving an LLC. Below are the steps specific to California LLCs.
Step 1: Vote to dissolve the LLC
The first step in dissolving your LLC is for members to meet and agree upon closing the business. Ensure that the vote for dissolution follows the procedures set out in your organizational documents including articles of incorporation, articles of organization, or the LLC operating agreement. If it is not outlined in these documents, follow the procedures in your state's LLC laws. Record the vote and keep it in the business's official records.
Step 2: File articles of dissolution
Articles of dissolution sometimes referred to as the certificate of dissolution or cancellation, are filed when formally asking the state to dissolve your LLC business officially. The California form may be found here. The form asks for details about your business and the members. You may be asked whether any assets were distributed and whether liabilities were paid. There is often a fee to file. There is no fee to cancel an LLC in California. However, you can expedite the cancellation process by submitting the request in person and submitting a $15 special handling fee.
The California secretary of state will provide a certificate of dissolution when you are approved. Make sure to file this document in your records.
Step 3: Cancel Permits and Licenses
Contact your state government’s agency that issued the permits and licenses for your LLC. Inquire how to cancel these licenses and permits. If you are entering into another LLC or business structure, you may be able to keep these permits and licenses and just transfer them over.
Step 4: Cancel EIN
Contact the IRS to cancel your LLC’s employer identification number. The IRS does not technically cancel your EIN but inactivates it and refers to this process as “account closure.”
Step 5: Cancel LLC name or DBA
Contact your state or local government agency that issued your LLC name or “doing business as” (DBA) title. Cancel or withdraw these documents.
As soon as the company is dissolved, the business name can be requested by another entity.
Step 6: File the final tax return
Certain states require LLC owners to obtain a tax clearance, consent to dissolution, or verification of good standing from the state's tax agency. You may be required to file your last tax return before applying for dissolution. Make sure to indicate that this will be your company's final tax return. You can submit a request electronically or via mail to receive the clearance from your state's tax agency. If you are up to date on filing tax returns, you will receive the certificate that declares you have no tax liability.
California does not require you to have a Franchise Tax Board clearance. As part of your filing, you just need to state that a final tax return has been filed or will be done with the California Franchise Tax Board.
Step 7: Pay Debts
Depending on your state, you may need to notify creditors prior to filing articles of dissolution. Creditors can include lenders, insurance carriers, and service providers. In California, you are required by law to notify your creditors when you formally dissolve your LLC.
Even if your state does not require notification to creditors, it still may be in your best interest to send one. Notifying creditors can help you pay your obligations and minimize liabilities for the future.
Step 8: Distribute Assets
Once you have finalized your taxes and paid your creditors, any remaining assets can be distributed to the LLC members. This includes profits, goods, and investments. The operating agreement filed when initially forming your LLC or your state's law will guide you on how to distribute assets amongst members.
Other necessary actions:
Other steps needed when properly closing a business include letting go of employees and settling severance packages, paying final payroll taxes, negotiating contract cancellations, and canceling business licenses and permits.
Finally, you'll have to close your business bank accounts, and your Federal Employer Identification Number and state tax identification number will be made inactive.
In California, the LLC also must file a Certificate of Cancellation (Form LLC-4/7). This form can be found here.
How long does it take to dissolve an LLC?
It can take more than eight weeks for the secretary of state to process a filing to dissolve your LLC. There is an option to have expedited processing in California. It can be completed within 24 hours or the same day with additional fees. It costs $350 for 24 hour expedited processing and $750 for same day expedited processing.
Can you reopen your LLC after it’s dissolved?
Once you dissolve your LLC or corporation, revival is not possible. You will need to form a new California entity. Therefore it is important to make sure that you truly want to dissolve your company before filing for dissolution.
Are you still liable for anything?
If you do not dissolve properly and just don’t file the statement of information reports by the deadline (60 days from the date on the notice of pending forfeiture), you may be responsible for a $250 penalty. Furthermore, if you failed to file a tax return and pay taxes, you will need to contact the Franchise Tax Board for any taxes, penalties, or interest due.
While you are not required to consult a lawyer when dissolving your business, it may be advisable. It may be helpful to work with a local business attorney or online provider to make sure you follow all the proper steps in dissolving a business as outlined in your state's laws.