If you’re thinking of closing your LLC before the year ends, you may be feeling overwhelmed. And you are probably wondering what you must do to exit the business without leaving any loose ends behind. Indeed, there is more to shutting down a business than merely ceasing to sell products and services. The exact actions a limited liability company’s members must take depend on where the business is registered, whether it has employees on its payroll, and other factors. It can be tricky to determine all the requirements, so LLC owners (a.k.a. members) should carefully research the things they must do. I also recommend getting guidance from an attorney, accountant, and tax advisor so that no legal and financial details aren’t overlooked.
Skipping any essential tasks when closing out an LLC could mean LLC members will remain responsible for various filings, fees, and other ongoing compliance tasks. States expect LLCs registered in their jurisdictions to comply with all legal requirements until the business is officially dissolved. Procedures for shutting down an LLC entity vary from state to state. Members should also review their LLC’s operating agreement, which should explain the company’s rules for handling the various aspects involved in closing. Below, I’ve listed some general steps that LLCs must complete when winding down their business.
1. Confirm the Company Is in Good Standing
Before dissolving an LLC from the states where it conducts business, the business entity must be in good standing in those areas. Have the LLC members kept up with ongoing business compliance tasks or has it fallen behind on filing reports and paying fees? If an LLC has fallen out of good standing, it will need to follow the state’s rules for restoring that status (possibly even filing for reinstatement) before its owners can proceed with dissolving the entity.
2. Hold a Vote to Dissolve the Business
Depending on the state’s laws and the rules outlined in the LLC operating agreement, it may require a majority vote or unanimous consent to approve the dissolution of the company. During the meeting to vote on this significant decision, the results must be captured in meeting minutes. Even if the company is a single-member LLC, holding a meeting and recording a vote (yes, with just that one member!) is advised and may be required.
3. File LLC Articles of Dissolution
Limited Liability Companies must file a form called Articles of Dissolution (which might instead be called Certificate of Dissolution or Certificate of Termination) with the state’s Secretary of State office (or other agency per the state’s rules). It’s critical to complete the form correctly to prevent processing delays that could result in unexpected costs and other issues.
If an LLC had requested foreign qualification to do business in states other than its home state, it must notify those states. Then, it can cancel any registrations, licenses, permits, business names, and anything else it may have applied for in those jurisdictions. Different states have different rules for what’s required to withdraw from doing business there. Typically, removing a foreign LLC involves filing a withdrawal application and paying a filing fee.
Dissolution of an LLC usually is considered effective on the date specified during the LLC member vote. The business may continue to wrap up its affairs (e.g., notify vendors, customers, creditors, liquidate and distribute its assets, etc.). In some states, businesses may specify an effective dissolution date up to 180 days in the future. However, backdating dissolution to an earlier date is not an option.
4. Notify the Company’s Stakeholders
Some states require that LLCs notify their creditors and vendors of their dissolution before filing Articles of Dissolution. Also, some states require that businesses publish notice of their dissolution in a newspaper or other publication within a certain period of time. These tasks help ensure that the general public – and anyone the LLC owes money – are aware that the company is going out of business.
5. Cancel Business Licenses and Permits
If an LLC had obtained licenses and permits to conduct business, members should inform the appropriate licensing agencies that the company is closing. Examples include:
- Zoning permit
- Professional licenses (e.g., attorney, registered nurse, accounting, psychologist)
- Seller’s permit
- Retail food license
- Salon license
Failure to do so could mean being on the hook to renew licenses even though the company no longer conducts business activities.
6. File the LLC’s Final Payroll Taxes
If an LLC has employees, it must follow through on its payroll tax registration responsibilities. The company must submit its state payroll forms and pay its taxes (SUI and SIT) after paying its workers for the final time. Companies that don’t have funds to pay their employment taxes in full may be able to set up an installment plan or “offer in compromise” (approval to pay less than the total amount owed to settle the tax debt). Limited liability companies must also issue IRS Form W-2 (Wage and Tax Statement) to each employee for the calendar year when they had final wages and salaries. Similarly, they must issue IRS Form 1099-NEC (Nonemployee Compensation) to independent contractors to whom they’ve paid at least $600 in the year the LLC is closing.
7. Pay Final Sales Tax
An LLC that sells taxable products and services must submit its final state (and local, if applicable) sales tax forms and payments. After that’s done, it may close its sales tax accounts.
8. File Final Income Tax Returns
Business owners also have some ends to wrap up when closing an LLC with the IRS.
A multi-member LLC must file its final Form 1065 (Return of Partnership Income) for the year the business is closing. According to the IRS, owners should check the box that indicates it is a final return. Likewise, LLC members should check the “final return” box on their Schedule K-1 form (Partner’s Share of Income, Deductions, Credits, Etc.).
A single-member LLC’s owner must file their Form 1040’s Schedule C (Profit or Loss from Business) with their individual tax return for the year the business is closing.
If the business has any employees, it must pay its final federal tax deposits and report employment taxes (Form 941, Employer’s Quarterly Federal Tax Return or Form 944, Employers Annual Federal Tax Return).
The LLC must follow the jurisdictions’ procedures for reporting and paying final income tax at the state and local levels.
There may be various forms required at the federal, state, and local levels, depending on the circumstances. Because the rules and processes vary depending on the jurisdiction and type of business, it’s helpful for business owners to talk with a tax professional for guidance.
9. Sell Company’s Assets
Liquidating and selling an LLC’s assets and inventory can enable the company to generate cash before it closes. A business facing financial difficulty could find this especially beneficial if it otherwise wouldn’t have sufficient funds to cover outstanding debts and creditor claims. Business owners may find a qualified appraiser’s expertise helpful to determine the value of physical assets (like furniture, equipment, etc.). Also, intangible assets (such as trademarks, copyrights, customer lists, and patents) should not be overlooked as opportunities to generate income for the dissolving LLC. It can be helpful to discuss intangible assets (their value and the process for transferring them) with an intellectual property attorney.
10. Pay the LLC’s Business Debts
Before closing, an LLC should pay off what it owes to vendors, suppliers, and creditors. If the money isn’t there to pay what’s owed in full, it may be possible to negotiate the final payment amount. The expertise of an attorney can be helpful when navigating the state’s laws regarding claims settlements.
11. Distribute the Remaining Assets
If an LLC has multiple members, it may distribute the assets left after the business has paid its debts. The LLC operating agreement should provide details on how the company should divide its assets among its members.
12. Keep Business Records for Future Reference
For years after an LLC closes, its members might face questions or audits. Therefore, it’s crucial for members to retain the LLC’s (and their individual) records that pertain to the company’s activities, forms, and transactions in a safe place where they are readily available if needed. Among the critical documentation: tax returns and payment records, financials, payroll and worker employment records, and other business documentation.
Stay current on the latest tax and accounting news by inviting My Fiscal Office into your inbox with our free monthly newsletter. Click here to sign up – https://lp.constantcontactpages.com/su/dwxNQXj
My Fiscal Office LLC
77 Bleecker Street
New York, NY 10012