Very few business owners form an LLC with dissolution in mind. However, dissolving an LLC needs to be discussed as you for the LLC so that it complies with the operating agreement.
What happens when you dissolve an LLC? When should you dissolve an LLC?
We discuss these concerns and more in this article and detail how to dissolve an LLC.
What is an LLC?
When entrepreneurs or business owners want to take their business to the next level, they consider forming a Limited Liability Company, also known as an LLC. This business structure allows owners to enjoy personal liability protection and pass-through taxation – the best of both a corporation and a sole proprietorship.
What is Dissolving an LLC?
As the name implies, when you dissolve an LLC, you end the business. This can happen voluntarily or involuntary and it can be temporary or permanent depending on a variety of factors.
When an LLC dissolves voluntarily, it’s written during the formation of the LLC in the operating agreement. The operating agreement also outlines how the business will be run and states why and how the LLC should dissolve if there is a reason. For instance, if the LLC was created for a specific purpose and that purpose is fulfilled.
Involuntary dissolution happens for a few reasons, the biggest being that the LLC has violated laws. Another reason can be that the members cannot agree on how to operate the business. Keep in mind that this is not the same as termination. However, it is the first step in the termination process.
One of the main purposes of an LLC is to protect owners from liabilities while conducting business. When dissolution is in process, the purpose is no longer to conduct business. Instead, the purpose is to liquidate assets and pay creditors if needed.
Reasons for Dissolving an LLC
As previously mentioned, dissolving an LLC can be completely voluntary. But why would a business owner want to dissolve their LLC? Typically, a series of events will lead up to the dissolution.
Here are some of the most common events that lead to dissolution of an LLC:
Company Going Out of Business – Whether it’s lack of funding or working capital or bad business management, companies go out of business for multiple reasons.
Not Paying Taxes or Following State Laws – One of the main benefits of forming an LLC is the tax flexibility it offers. Regardless of the taxation you choose, there are certain taxes that must be paid. Additionally, every state has its own laws for LLCs, and you must stay in compliance with them to stay in business.
Bad Management – Managers must have a plan in place to achieve growth goals. They must be skilled in multitasking when it comes to handling responsibilities and properly managing a team. If they cannot perform these tasks, the business has a high chance of failing.
New Job / Retirement – Oftentimes, entrepreneurs, freelancers, and small business owners choose to take a different path in their career. And others will start an LLC for a short period of time until they reach retirement.
Member’s Vote to Dissolve the LLC - When multiple people disagree, conflict arises. If the conflicts cannot be resolved, LLC members may vote to dissolve the business. The best way to avoid disagreements is to create a detailed operating agreement stating the responsibilities, duties, and powers of each member.
Death of a Member – LLCs can survive after the death of a member, but only if there are other members and it’s outlined in the operating agreement. If proper paperwork is not filed, or there is only one owner, the LLC will dissolve in the event of death.
How to Dissolve an LLC
Forming an LLC is much easier than dissolving one. Every state has different rules and regulations for dissolving an LLC, but there are general steps for every owner to follow.
Vote to dissolve the LLC – If there are disputes among members that cannot be resolved, then all members will vote to grant approval of the dissolution of the business. Typically, voting for dissolution is outlined in the operating agreement.
File articles of dissolution – Once all members have voted in favor of dissolution, the LLC must file paperwork with the state. This document is known as a Certificate of Dissolution and is filed at different times in the process, depending on the state. The articles of dissolution end your LLCs existence and protects you from future taxes, fees, and liabilities. To avoid fees and penalties, you must file this document with the state or states in which you operate.
Cancel Permits and Licenses – If you have any LLC licenses or permits, you’re required to report them and pay any associated fees.
Cancel EIN – The IRS cannot cancel, reuse, or reassign an EIN. However, it can be reused by you if you can (and choose) to reopen the LLC.
Pay Debts – All creditors must be notified and paid before closing your business. Negotiations or rejections may be brought about by the creditors, depending on the situation and outstanding balances.
Distribute Assets – Once all debts are paid, the remaining assets must be distributed among members depending on how big their share of ownership is - and this distribution must be reported to the IRS.
Generally, the time it takes to dissolve an LLC takes anywhere from 3 to 5 days, and 4 to 6 weeks for the request for certificate of account status to process. The time frame varies from state to state.
When dissolving an LLC, you’re looking at approximately a month to month-and-a-half before complete dissolution.
To find out more about the LLC dissolution process in your state or to get help in handling the whole ordeal, it’s best to consult with a business attorney.
What Happens after you dissolve your LLC
Depending on why your LLC was dissolved, there are a few things that can happen.
As long as you properly left the LLC in good standing and paid all debts and creditors, you can reopen your LLC. The IRS will assign you the same EIN, however, the business name may be taken.
If you’re dissolving an LLC, it’s best to seek legal help. When an LLC is not dissolved properly, there are multitudes of issues that can arise – such as lawsuits and liabilities. You can also face fees and penalties with the state.
From the beginning, it’s best to work with a business lawyer who can help you determine your goals and write an operating agreement that will help with dissolution if necessary. A lawyer can also assist with the process of dissolution and help with creditors and/or liabilities if they arise.