If for some reason you want to shut down your LLC, it can be very tempting just to shut your operations and skip the legal formalities.
But just like there are steps to form an LLC, there are steps to close an LLC as well.
Without following the correct legal steps for LLC dissolution, there can be many serious legal troubles.
For instance, if an LLC owns any property, it is only after correctly closing the business that the property will personally belong to the owner. But if you do not follow the steps, the property will continue to be in the name of your LLC. You cannot claim it to be your personal property.
Similarly, there can be many other problems related to state fees, business bills, filing requirements, permits, and more.
Why get in all these troubles when you can legitimately close your LLC easily? Most states in the US have clear laws and provisions for shutting down an LLC and avoid any lawsuits or debt liabilities.
Note that the steps can slightly vary between states. But they are more or less the same in most of the states.
Step 1- Vote to Dissolve
To close an LLC, the first step is to take a formal decision that you actually want to dissolve your business. This is easy in case of a single-member LLC as you are the only one to make the decision.
But if you have a multi-member LLC, you will have to call a meeting of all the members for confirming the decision. In most states, the standard majority dissolution vote is applicable. But there are some states where a 2/3rd majority vote is required.
Moreover, there are also a few states where every member of the LLC has to give their confirmation to dissolve the LLC in writing. You can check the dissolution requirements of your state to know more about this.
Step 2- Informing the Secretary of State
Now that the decision is final, the next step is to inform the same to the Secretary of State. The official website of your Secretary of State will mostly have a form for dissolving LLCs.
Fill this form and submit the same with the state. The department will then go through your application and will formalize the LLC dissolution. After this step, your LLC name will be legally closed down by the Secretary of State.
Step 3- Formal Notice
Once the LLC members have made sure that they want to close their LLC, they also have to give a formal notice about the same to all the creditors.
In case if they want to file any lawsuit against your LLC, this will allow them to know the timeframe within which they should proceed with the suit before you shut down your LLC. Some states require dissolving LLCs to publish about it in local newspapers.
The rules vary between states. So, check with the Secretary of State to know how long before dissolution do you have to publish the notice. Also, go through how and where the notice should be published.
Step 4- Managing Finances
The next step is managing the finances of your LLC. Before closing your LLC, you have to clear all the outstanding bills of your business. You will also have to make provisions for any obligations which the owners might currently be unaware of.
Before distributing business assets, an LLC should first clear all of its debts. Every owner of the LLC is personally liable to creditors, and they can take legal actions against the owners if their dues are left unpaid.
You will also have to cancel all your vendor accounts, utility accounts, and also inform your customers or clients about the LLC closing its operations. Your employees should also know the closing date of your LLC, and you should also pay their salaries appropriately.
Step 5- Tax Obligations
When closing an LLC, one of the most important steps is to manage the taxes. You will have to close the tax accounts of your LLC with the IRS as well as the state by paying the taxes if you owe any. Also, check that the sales taxes and payroll withholding is up to date.
When filing the final tax return, check the box which says this is your final tax return for your LLC. After filing the Schedule K-1, pass its copy to each of the LLC members so that they can pay appropriate business taxes through their personal income tax.
LLCs also have an EIN (Employee Identification Number). You need to inform the IRS that you do not require your EIN anymore.
Step 6- Closing Bank Accounts and Cancelling Business Permits
After managing the finances and taxes, the next step is to close all your business accounts. Close or cancel your business insurance accounts, licenses, permits, and registrations.
Once you do this, create a copy of everything and keep them safely with you for at least seven years in case if you are audited.
Step 7- Dividing LLC Assets
After paying the debts and taxes, the remaining assets of the LLC can be divided between the members if it is a multi-member LLC. If you are the single owner, the assets will now belong to you.
The division of assets should be according to the ownership share of every LLC member as per the operating agreement of the LLC. The LLC is considered legally closed after the completion of this final step.
While all of this might seem too much, know that this is the only correct way to avoid lawsuits or debt liabilities. Once you have decided that it is time to close down your LLC, go through the state requirements for shutting down the operations of LLC to know more about the steps mentioned above.
Most LLC owners rather than handling this process on their own, prefer working with tax professionals and attorneys. You too can do the same to avoid any discrepancies in the future.