Like other businesses, there are many reasons why you may want to close an LLC. Business closing motives could be you decide to retire, the business cannot operate anymore, or you simply no longer want to conduct business with your LLC. Whatever it is, this guide will walk you through how to properly dissolve this business structure.
The LLC is established and registered in the state where the Articles of Incorporation were submitted.
Shutting down goes beyond providing the Secretary Of State a comprehensive set of Articles of Dissolution. It is only one component of the process of shutting a limited liability corporation.
In this article, we'll give you step-by-step instructions on how to close an LLC.
Let's first answer, if a business owner can just walk away from an LLC without any problems.
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If you are a member of an LLC, you cannot just walk away. In order to avoid unexpected expenses later, you'd want to formally close the LLC. In fact, many States LLC requirements include annual fees to run an LLC. If you don't close your LLC, your state may continue to charge you taxes, fees, and possibly late fees.
You'll have to keep paying your existing contracts and leases if you don't terminate them.
There are processes to follow, including how the remaining membership is notified, how assets are managed, and what the withdrawal provisions are for each LLC.
Many business owners opt to open an LLC to avoid personal liability for the debts of a business.
By forming an LLC, since the business is separate from the owner, only the LLC is liable for the debts and liabilities incurred by the business. However, what does that mean if the company has too much debt, is not profitable and the owner wants to shut it down?
If the business had outstanding debts, members must notify their creditors, pay those liabilities from business assets before distributing remaining assets to members.
Depending on what State you live in, there will be specific claim-submission procedures and deadlines for submitting them. Creditors receive priority when it comes to the distribution of assets.
If an LLC does NOT pay creditors and instead makes distributions to members, the LLC owners could risk being personally liable for business debts.
The LLC is financially insolvent if it does not have enough assets to discharge its outstanding debts. In that case, the members are only accountable to the extent of their own position in the company.
Working with a bankruptcy lawyer or law firm could be beneficial to members of an insolvent business. The court can determine which creditors have priority for repayment if the company files for bankruptcy. Now, let's talk about how to properly close your business.
Closing an LLC is important because you can be held personally liable for any of the LLC's outstanding liabilities. You could face personal liability for the following if you don't legally dissolve an LLC properly.
The LLC's owners should familiarize themselves with their specific state's limited liability company statute. To shut down the corporation properly, the members should follow the law's provisions.
We'll review each step to dissolve you need to take to properly do so in the next section.
To dissolve, LLC members must agree to give up the company's ability to conduct business. Every state has different requirements for how many votes you'll need. Generally, you'll just need a majority or two-thirds vote or agreement to dissolve an LLC. Some States, on the other hand, require you to have a unanimous written agreement put in your LLC records book.
Research your State's rules. If you have a single-member LLC or are your own business, then you won't have to worry about taking vote. However, you'll still have to comply with the legal steps required for your State.
An operating agreement is a document used by limited liability companies to outline the business' financial and functional decisions. They include the rules, regulations, and provisions to direct the LLC.
Closing procedures may also be formally written in the operating agreement. Be sure to check this out before proceeding.
Once you have voted to close your business, you'll need to file your final tax return with the Internal Revenue Service.
Since an LLC is a business organized under state law, an LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as separate from its owner.
Whichever structure you are taxed as you'll need to file the final return to close the business. Forms, fees, and filing procedures vary from State to State. For instance, in some States, you'll need to get a certificate from the State taxing agency. The certificate would be attached to the dissolution papers and sent to the Secretary of State.
It is necessary to file your federal tax return the year your LLC closes.
If you need assistance to determine the taxes you'll owe through the effective closing date, we always recommend you contact a tax professional.
The State may require you to speak or notify creditors before you file articles of dissolution. Folks who fall into the category of a creditor may include lenders, service providers, suppliers, insurance carriers.
If a corporation, LLC, or partnership cannot pay all of its debts, state law precludes the company from distributing its assets to its shareholders.
Not only are there penalties, but unpaid creditors can sue the owners for the recovery of their assets.
Many States require the notice to have specific information and their own requirements for how far in advance you need to send this notice. The information contained in the notice will vary depending on what State you reside in. For example, some States require you to have a written notice in the local newspaper to announce the dissolution of your LLC.
Even if a notification to creditors may not be required in your State, you may want to still do so. The reason for this is that you'll be able to settle all of your obligations which reduces the chances you'll have liabilities, outstanding payments or debts haunting you in the future.
After you settle your outstanding debts, you'll distribute and divide the remaining assets to your members. Assets can include non-tangible ones like intellectual property, customer information, projection of future revenue, brand presence, patents, trademarks, and copyrights. Unless you are a single-member LLC, distributions will be shared according to to the balance of each member's capital accounts.
Capital accounts are individual accounts of each member's investment in an LLC. These accounts track the contributions of the initial members to the LLC's capital, as well as adjustments for additional contributions.
LLC distributions are made to members and partners according to the balance in each member or partner's capital account.
If there isn't enough cash to pay each owner the amount in their capital account, which is likely, whatever cash or assets are left are divided among the owners according to the size of their capital accounts.
Protect your finances and reputation by canceling any of these that you don't use anymore, including your business name.
In this step, you'll want to cancel registrations, business permits, licenses, and company name. Let's quickly break down how to terminate each.
You can cancel a business name registration with your local government if you have registered using an assumed or trade name different than your own name.
You must file a form for abandonment of the business name with the same agency if you filed a fake (or assumed) business name or DBA statement.
Notify State and Federal tax agencies to cancel your employer identification number.
Determine all the State, County and Federal business licenses or permits your LLC uses to run and begin the process of terminating them.
Ensure that you cancel all licenses and seller's permits that you will no longer need to protect your finances and reputation. Some registrations or licenses require a deposit. Make sure you get them back when you cancel.
Be in touch with any other agencies where you need to cancel your license so you don't pay any additional fees.
Lastly, don’t forget to close out your business checking account and cancel your business credit cards. It should be noted that none of your LLC's tax accounts can be shutdown if they have a remaining balance due.
All taxes, fees, penalties, and interest must be paid off in order to officially dissolve your LLC.
After you hold the meeting and you'll need to provide the Secretary Of State a set of Articles of Dissolution. Articles of dissolution is a formal document in which you ask the state to officially dissolve or end your business.
If the business is not in a good position to close, when you file articles of dissolution with the Secretary Of State, it may include more steps to dissolve the company. In the dissolution articles, it'll ask if the owners have paid all debts and liabilities and whether the remaining property was distributed or not. Most States charge a small fee for filing the form—check the form instructions for the amount. You may have to send in the paperwork with the appropriate amount.
If you have questions on the paperwork or instructions, most States provide very clear procedures for dissolution on their websites.
After filing Articles of Dissolution, the name of your LLC will officially close your business.
Through this entire process, you'll want to keep detailed records of asset distribution, debt payments, tax receipts, etc. Even after your firm has closed, you may be legally obligated to keep records, notably tax and employment records.
A good rule of thumb for keeping records is to keep them for three to seven years.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?