Starting an LLC is an exciting time. However, while the paperwork for LLC formation is easier than ever, running a business that stands the test of time is a whole other matter.
This means that LLCs close all the time and for many reasons too.
The good news is, the process is not particularly demanding. Which is a good thing as winding up a business can be emotional and stressful.
Knowing what to do to officially closing your LLC is one less thing to worry about.
In order to help you achieve this, we will look now look into the common reasons for closing an LLC and the exact steps you need to take to do so.
Table of Contents
Common Reasons for Closing an LLC
The members of an LLC (whether it is single ownership or joint) can decide to dissolve a business at any point.
Personal reasons and/or the business not performing as well as expected are the two most common causes of LLC closure among single ownership ventures.
These cover a whole range of circumstances of course.
In some scenarios where an LLC is formed, the State of formation asks that an expiration date or conditions of closure (such as the death of a member) are provided.
If this is the case and a set time frame exists and is reached, the LLC is then closed due to expiration.
Business Purpose has been Completed
If the LLC has been started for a specific business purpose, such as a housing project (or in a personal case, to off-load various digital assets that I had created), once the business has been concluded, it may make sense to close the LLC.
Although in general terms this is seen as the completion of business, the process of dissolving the LLC would come under voluntary closure.
Administrative closure may occur where a business has run into problems with the authorities.
This may be through breaking state laws, unpaid taxes, or operating without applicable licenses. Hopefully, you will never fall into this category.
The State may also move to close an LLC if contracts with other parties (clients and customers) are broken and a business has been through the courts due to breaches of these contracts.
Oustanding debts and obligations may be reinforced before closure, however.
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Clearly, if a business file for bankruptcy the LLC will eventually be closed. This is all subject to the completion of lawsuits from lenders and other potential disputes.
However, after these have been resolved, the LLC will be closed by the state if the members haven’t done so already.
If members come to blows and the situation can not be resolved amicably, in some cases closure of the LLC is the only option.
The most common cause of discontent between members is the spread of duties and profit and loss.
Although this should be made clear on formation, if members fail to comply or if individuals feel that the distribution is not fairly allocated, serious problems can and will arise.
If left unresolved, LLC closure is very often the outcome.
No More Members
If a situation arises where there are no more members the LLC will be forced to close.
One factor that can solve this is the allocation of shares being distributed to heirs. The ownership then belongs to these heirs.
However, in many cases, this leads to the closure of the LLC due to heirs being unwilling, or incapable of continuing the business.
If there are no clauses within the formation document that legally designate heirs, the LLC will be closed by the State.
Process of Closing an LLC
Okay, so we have looked through some of the reasons an LLC is closed. Let’s now go through the steps of the process.
The guide that follows is most applicable to voluntary closure. Which as we have explained, is the most common cause of the end of an LLC.
1. Vote on the Decision to Close
The first step involves getting the vote of all members to agree to the closure.
Clearly, if you a sole member, your decision is enough.
In the case of multiple ownership, a majority vote is enough to close. However, each member must be given the opportunity to vote.
The exact details are specified by the Secretary of State’s office for the state where your LLC was formed, however, principally, these are the terms of the voting rights.
2. File the Closure Document with the State of formation
The next step towards LLC closure is to notify the State of the decision.
This involves submitting the correct documentation with the signatures of the members stating that the LLC is to be closed.
Essentially, this paperwork is the opposite of the formation documents (the Articles of Association).
Called the Articles of Dissolution, you can obtain them from your Secretary of State’s website.
Not only do these documents signify your intent to close the LLC to the state, but it is also used to officially notify vendors and others that you have business relationships with, that the LLC is to be closed.
3. Notify All Stakeholders
If you haven’t done so already, now is the time to officially inform all stakeholders that the business is to be closed.
Employees are the important ones in this situation. They need to know that they will be losing their jobs.
Customers and suppliers should also be informed.
Any commitments you had with stakeholders should be fulfilled if possible. Outstanding debts clearly have to resolve.
You may also have to cancel orders and applicable contracts.
Banks, lenders, utilities, and landlords if you rent business premises must also be contacted.
In many ways, this is the toughest part of closing an LLC, especially when dealing with the feeling that you may have let people down or put them in a precarious position.
The “tying up of loose ends” is emotionally draining, but necessary. Once you have achieved this, you will be close to ending the LLC and being able to move on.
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4. File the Final Tax Return
While your accountant will be able to take care of most of this, filing your final return will involve some work on your part.
The fact that the dissolution of an LLC can happen at any time, you are not expected to wait for the end of the financial year to file your return.
The standard tax filing procedure that you followed during the life of your LLC applies here. The big difference is that you will have to declare that this is the final return by simply ticking the applicable box.
5. Cancel Appropriate Licenses
Now you have reached this stage, you are basically there. Your LLC will be officially closed with the state of formation and business ties have been cut.
The last step is to ensure that any state, local, and federal licenses and permits you applied for in the running of your LLC are canceled.
All of these will have varying canceling procedures and it will be up to you to contact every relevant agency to begin the process.
It is important to complete this as you do not want government agencies knocking on your door for failure to do so.
And there you have it, you have closed the LLC and you will be ready to undertake whatever the future holds.
Whatever the reasons for the closure of your LLC, try to remember the positives of the experience of running an LLC and take them forward into any future ventures.