If you no longer want to run your venture, then following the formal cancel procedure will be essential. Of course, meeting all the legal requirements may seem like a waste of time, but you cannot just stop operating and forget about your LLC. Complying with the statutory process is the only way to avoid unexpected costs and legal complications in the future.
Importance of Closing an LLC Properly
Why do you need to pay special attention to all the stages of closing a company? Above all, to comply with legislation and protect yourself.
The official process of closing an LLC is not just a pro forma. It is a way to notify the state, the IRS, and other interested parties that your entity ceases to exist. Unless you notify the IRS of the closure properly, it will continue to charge taxes on your LLC, which can cause significant expenses. In addition, if you simply stop doing business, the state has the right to impose penalties for failing to report.
Besides, the issue concerning assets should be taken into consideration. The owner contributes money or other property when creating an LLC, and these assets become the property of the company. Since an LLC is a separate legal entity, its funds are separate from the owner’s ones. To get your money back, you will probably have to officially dissolve your business.
Lastly, shutting down a business allows you to cancel licenses, permits, as well as a DBA in case you have obtained one before, and to abandon the company name. This way, you can avoid legal challenges if someone else decides to operate a business using the name of your firm.
Steps To Closing Your LLC
The process of closing a business is largely state-specific, but there are a few basics relevant to any LLC.
1. Decision-making phase
Whether you have a single-member or a multi-member LLC, the resolution to close the enterprise should be properly documented. It involves holding a formal meeting of the owners and voting following the rules outlined in the company’s Operating Agreement. If an LLC does not have its own rules for voting and decision-making procedure, then the state’s default rules will be applied. Depending on the state, you might be required to provide a majority vote, ⅔, or unanimous decision to approve the dissolution. The results of the vote should be recorded in the minutes.
2. Submitting documents
The official business closing is done by preparing and filing the appropriate form. Visit the state agency’s website to find the correct application. To fill it out, you need to provide key information about the entity. Additionally, there may be a state fee for processing the paperwork.
It is the most critical step in the business closing procedure, as once your application is approved, the company will be considered dissolved. It can exist only to complete the winding-up process. Doing business after this point is prohibited.
3. Notifying your business creditors
To protect the creditors’ interests, the law requires an LLC owner to inform them of the closure of their business. The requirements for the number and type of such notices, as well as the need to publish them in the newspaper, vary from state to state. Take into account that the notice should clearly state the time frame for the creditor to claim against the company. It often varies from 3 to 5 years.
4. Liquidation of obligations
Any debts of an LLC are to be paid, as well as obligations should be satisfied. When planning your expenses, consider that there may be additional requirements in the process of closing your business venture, which you have not been aware of before.
After meeting creditors’ claims, make sure you don’t have any arrears for your employees. Furthermore, you should check the vendor arrangements and utility bills of your LLC.
Finally, this is a good time to make demands on your customers or other parties, who have not yet paid off your organization.
Paying all business taxes is a vital part of the closing process. The most common of them include sales and use taxes, payroll taxes, and unemployment insurance taxes.
After taxes are paid, you have to file a final tax return with the IRS. There is no separate form for doing this. You should submit the regular form by checking the box indicating that the return is the last one.
Additionally, if your firm is taxed as a partnership, you will probably need to prepare a Schedule K-1. A copy of this paper should be given to all LLC members. That way, each of them will know what percentage of the company’s profits and losses to report on their personal return.
6. Closing your business
During the LLC dissolution process, you have to cancel any licenses, permits, and bank accounts the company has previously obtained. You will also need to cancel a DBA if you have registered a fictitious name for your business.
One more thing to keep in mind is the EIN. It allows many companies to pay taxes, hire employees, and open a bank account. However, if you no longer plan to run your business, you should notify the IRS that you are closing your EIN.
7. Asset distribution
The funds remaining on the company’s balance sheet after satisfying creditors’ claims and paying taxes and fees are distributed to the members. Each owner’s share and percentage of ownership they may be entitled to when closing an LLC is usually listed in the Operating Agreement.
Thus, the process of closing an LLC is not extremely difficult. By following this simple guide, you can easily handle all the technicalities and move on.