When You Should and Shouldn’t Dissolve Your LLC

When You Should And Shouldn't Dissolve Your LLC

Running a business has its ups and downs. There may come a time when you ask yourself if it is time to close your company or if it is better to continue it. When that time comes, you have to make a well-informed decision based on the circumstances.

Understanding Dissolution

Before you dissolve your LLC, you have to understand what it entails first. Generally, dissolution refers to the process that a company has to follow in order to formally end its operations. The steps and requirements will depend on the state where you formed your business entity.

One common misconception is that dissolution is synonymous with liquidation. While those two are necessary for closing a business, they are different from one another in several ways. For instance, dissolution will allow company closure only if there are no existing debts or if the business can settle its liabilities in full within 12 months. Liquidation, on the other hand, has to do with extracting company assets, selling them, and using the earnings to settle outstanding debts.

When to Close Your Business

In most cases, LLCs are formed to have an unlimited time of existence. However, things do not always go according to plan. Sometimes, you will have no other choice but to close the business.

There are various reasons why voluntary dissolution is necessary. Here are the most common ones:

  • Financial Issues Or Low Cash Flow
  • Mismanagement
  • Negligence In Accounting
  • Bankruptcy
  • Disagreements Among Members
  • LLC Purpose Has Been Served
  • Forming Another Legal Entity

While it is hard to decide to end your business operations, it may be the best option. If you are unsure whether you should or should not dissolve your company, find out if your company is experiencing any of the above mentioned circumstances. You can also ask yourself the following:

  • Do you still have a market for your products or services? Market conditions may change. The things you observed before starting a business may not be applicable to the present. Assess the current market trends and find out if your company still has a place in the industry.
  • Are you still having fun? Most entrepreneurs start businesses related to what they are passionate about. That is what makes the whole experience exciting. If managing the company no longer makes you feel happy and seems like a chore, it may be time for you to move on to something different.
  • Is the company still profitable? Cash flow may be slow during the start of a business. However, if your company still does not make a profit even after five years, you may have to evaluate your position. When you start a business, you have to establish a time frame. It should indicate the time that you think your company needs to start being profitable. If your company fails to break even at that point, it will be best to shut your shop down.

How to Dissolve Your LLC

When you formed your business, you registered it with the state agency in charge of businesses by filing formal paperwork and paying a fee. You may have also submitted documents to state or county tax and licensing authorities and the Internal Revenue Service (IRS) to inform them about your operations. So while you are running your business, you have certain compliance obligations with all of those agencies.

While the dissolution process depends on the state where you formed your company, there are some general steps you will have to complete regardless of where you do business.

1. LLC members have to grant the dissolution. Before filing for dissolution, the members of the LLC have to vote on it. Check your operating agreement to see if there is a specific clause regarding business closure.

2. Submit formal dissolution paperwork. You will have to submit a document with the state where you operate. You should also cancel all business licenses and permits.

3. File your final tax forms. Pay the entire amount due, and inform the proper agencies that it will be your company’s final tax return. 

4. Notify creditors about the closure and settle claims. Inform them where, how, and until when they can file claims.

5. Distribute any remaining assets. If your company still has assets, distribute them according to ownership interests. 

Failure to properly dissolve your LLC means that it will continue to have reporting and payment obligations with federal, state, and local agencies. They will think that you are only a delinquent company and may impose fines for not submitting requirements on time.