How to Close an LLC: 7 Steps From the Member Vote to the Certificate of Cancellation

To properly close your LLC and avoid legal trouble later on, you need to be aware of the steps involved. The membership votes to dissolve, the company files the required paperwork, it notifies and pays its creditors, files final taxes, distributes whatever is left to its members, and then files a certificate of cancellation. The exact steps and timing are set by state law and by the terms of the LLC’s operating agreement.

State law provides for voluntary, judicial, or administrative dissolution. In other words, the dissolution may be decided on by the LLC’s owners, the state, or a court. LLCs can be dissolved by the state if they fail to file the proper reports or fail to pay required state taxes and fees. Some states provide a way to reinstate the LLC if it files the correct paperwork or pays the taxes and fees within a certain time.

You should look at your operating agreement for a provision on how to dissolve the LLC. It might specify the percentage vote of members required for dissolution. If the operating agreement says nothing, the Delaware default rule is that members holding more than two-thirds of the current interest in profits must vote or consent to dissolve. The US Small Business Administration advises putting the decision in a written agreement.

The next step after the vote is to file an official document with the state. State by state, these are the articles of dissolution or certificate of dissolution, and they are filed in every state where the business was registered. In some states there is no fee, but others assess a charge. It is important to get this done in order to close your account with the state’s business division. If you do not, you will keep being billed for annual fees and taxes.

Notify employees that you are closing down and pay their last wages on schedule. Alert creditors that the business will be closing, including the bank, vendors, landlord and utilities. A company has a legal duty to pay off its debts before it distributes anything to its owners. Give creditors a deadline to file claims. Each state sets the window for creditor claims, such as between 90 and 180 days, and some states require the notice to be placed in a newspaper advertisement.

The deadline on your state notice is important. After that point in time, a creditor generally cannot collect on debts owed by the LLC. However, the protection has limits. If an owner knew about a debt but the LLC did not pay it, a creditor could sue the owner for the amount the owner received from the company. If they signed a personal guarantee or a court pierces the veil of the LLC they could be liable beyond that amount. A Delaware LLC cannot close down and distribute all of its property unless it sets aside reasonable money for claims that are likely to show up within 10 years. If a member takes a distribution while knowing that it wrongfully skipped creditors, they will generally have liability for it for the next three years.

Final Taxes

Every business must pay its final taxes. This includes payroll taxes and all others. A final tax return is in the same format as an annual return, but different in that it is marked final. A multi-member LLC that is taxed as a partnership will need to file a final Form 1065, checking the final return box. Form 941 is the company’s quarterly payroll report. The last Form 941 must cover wages paid up to the last payroll paid.

Some states require a clearance that there are no taxes owed. Once the state tax department has checked off its boxes on the return, you can get the clearance form you need to file your articles of dissolution. Other states do not insist that you clear the tax side of the ledger before filing your dissolution.

Your local and state agencies would appreciate it if you canceled your licenses and permits. This prevents you or anyone else from continuing to use them, or running up more fines and fees, in your business’s name.

The members should follow the operating agreement rules to divide up the company’s assets, such as cash, property, real estate and investments. State default rules can apply where there is no agreement, and often the assets are split according to each member’s shares in the company. Property that is hard to divide might need to be sold so the proceeds can be split.

The final step is to file a Certificate of Cancellation. It is a final action, ending the life of the LLC. In Delaware, the fee is $220, and in order to file you must first pay all taxes due through the date of cancellation. This includes Delaware’s annual $400 tax, which is not pro-rated in the year of cancellation.

In California, the company must pay any taxes owed and file an LLC-4/7 form with the Secretary of State, which formally cancels the LLC. Timing is important and tricky because of the potential to owe the $800 annual tax for the final year.