Every week, countless entrepreneurs face a decision they probably never anticipated when launching their dream business: how to properly dissolve it. Whether the business has been sold, is transitioning to a different structure, or didn’t yield the expected returns, dissolving a company can be just as involved as starting one.
Beyond the emotional aspect of dissolving a limited liability company (LLC), there are assets to divide and extensive paperwork to handle. Skip a step or miss a deadline, and you could find yourself dealing with unexpected tax penalties and legal obligations. Let’s walk through the steps needed to properly dissolve your LLC.
Why dissolve your LLC?
Dissolving an LLC refers to the formal legal process of permanently closing an LLC and ending all its business operations. It’s a structured undertaking that includes settling debts, distributing business assets, filing final tax returns, and officially notifying business authorities.
Business owners might consider dissolution in the face of a variety of events, both planned and unexpected, such as:
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Financial difficulties. Money troubles can force dissolution, particularly when expenses exceed revenue and the LLC approaches insolvency.
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Retirement. Retirement is another common dissolution trigger. Many small business owners build LLCs around personal expertise and may decide to dissolve rather than sell.
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Member disputes. Internal disputes between LLC members can also lead to a dissolution, especially in cases when the operating agreement doesn’t provide a clear path for buying out departing members or resolving fundamental disagreements about the company’s direction.
Even successful businesses may strategically opt to dissolve for practical reasons, including:
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Recurring obligations. Some business owners dissolve their LLCs to end recurring obligations like annual fees, mandatory annual reports, and business tax and filing requirements. This is particularly common when the business is no longer active, but the owner has maintained the LLC’s legal status out of habit or uncertainty.
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Restructuring. A business owner might dissolve their current LLC to restructure as a different business entity that better suits evolving needs, such as transitioning to a corporation for expanded growth opportunities, or switching to a sole proprietorship or partnership for simplified operations.
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Temporary business. If the LLC was formed for a specific purpose that was only temporary and has since been completed, it might make sense to dissolve the LLC.
How to dissolve an LLC
- Decide to dissolve
- Vote to dissolve
- Notify creditors and settle debts and liabilities outstanding
- File final tax returns and get tax clearance
- Notify licensing authorities
- File dissolution paperwork
- Close business bank accounts
- Distribute remaining assets
Dissolving an LLC isn’t as easy as walking away from the business and never generating another dime in revenue. You must take specific steps that vary depending on the state where your LLC is organized, although they all follow the general outline below:
1. Decide to dissolve
Your company’s dissolution process starts with a decision to close. If you are a single-member LLC, this part is easy; the decision is yours alone. However, if you have multiple members, you’ll need their consent.
2. Vote to dissolve
If you operate as a multimember LLC, simply sitting down and coming to an agreement on closing shop isn’t sufficient. You will have to conduct a formal vote and record the results. The voting process should be conducted in accordance with your LLC’s operating agreement. If you don’t have an operating agreement, the vote should comply with the state laws where your LLC was formed. Usually a simple majority vote is sufficient—but an operating agreement may dictate a super majority or unanimous vote.
3. Notify creditors and settle debts and liabilities outstanding
After deciding—and if necessary, voting—to dissolve your LLC, one of your most important legal obligations is notifying creditors. Your official dissolution notice must inform all creditors about your plans to wind down the business and provide clear instructions for submitting any claims outstanding. The deadline for submitting claims varies by state, typically from 90 to 180 days from the date you sent the notice. The notice should explicitly state that claims submitted after the deadline are invalid.
Many states require business owners to complete notification of creditors before filing voluntary dissolution paperwork with the secretary of state. Even in states where notification is not mandatory, sending formal notices to creditors is still considered a best practice. It’s a proactive approach to managing business debt that helps protect LLC members from future liability and ensures a clean break.
Remember to cancel vendor contracts and inform your customers and employees. Employees must be told what their last day of employment will be, and you may need to provide severance pay.
4. File final tax returns and get tax clearance
One of the most important steps in dissolving an LLC concerns taxes. You must contact federal, state, and local tax authorities to determine any taxes owed before dissolution. If your LLC owes state taxes, pay them promptly to receive a consent to dissolution notice, a tax clearance certificate, or similar document from the state tax department. Some states require that you submit a tax clearance certificate along with your official dissolution documents.
You will also have to file necessary tax returns, and indicate that this will be your LLC’s final return. Local, state, and US Internal Revenue Service (IRS) tax forms typically contain checkboxes, or some equivalent feature, in which you can indicate that the return is final.
And remember—if your LLC has employees, you will have payroll tax obligations. This involves filing all required payroll tax returns (Form 941 for federal taxes and state equivalents), submitting final wage reports, and paying any payroll tax obligations outstanding to both the IRS and state tax authorities.
5. Notify licensing authorities
If your LLC operates with any professional licenses or business permits, you should also notify the state and federal agencies that administer such licenses and handle any fees outstanding. For example, if your LLC holds a liquor license, you need to inform the state alcoholic beverage regulator of your dissolution.
6. File dissolution paperwork
Once you’ve completed all of the above, it’s time to file articles of dissolution, or a certificate of termination, with your state secretary of state’s office. This agency is also where you filed your LLC’s formation documents.
This legal filing officially tells the state government that you plan to close your LLC. The specific dissolution paperwork requirements, associated state filing fees, and processing times vary by state. You can usually file online.
Once accepted, your LLC will officially dissolve, legally end, and be listed as “Terminated” in public records.
Again, before your LLC dissolution is approved, some states require you to provide a tax clearance certificate from the state department of revenue, showing that no taxes are due. Additionally, if your LLC operates under a fictitious business name (a doing business as, or DBA), you’ll need to formally cancel these name registrations as part of the winding up process. For guidance on your state’s specific requirements, you can consult your secretary of state’s website or work with a professional LLC dissolution service to ensure all necessary paperwork is filed.
You can also request that the IRS cancel your federal employer identification number (EIN) by sending the agency a letter stating that your LLC is closing.
7. Close business bank accounts
Once your LLC dissolution is approved, it’s time to close all business-related bank accounts. Hopefully, by this point, you’ve already cleared all of your LLC’s debts and liabilities. You also may need to stop all auto-pay plans tied to a company credit or debit card, or auto-withdrawals from your LLC’s checking account.
Your bank may require some documentation to close any accounts. This might include dissolution papers, a formal letter requesting business account closure, and confirmation of the person authorized to close.
8. Distribute remaining assets
The final step is to distribute any remaining assets to the LLC’s members. The LLC’s assets should be distributed to the members in compliance with the LLC operating agreement. For example, the operating agreement may mandate distribution of assets according to each member’s percentage stake in the LLC. Be sure to maintain an accurate and detailed record of the asset distribution process, including the specific amount given to each member, in the event of any future disputes.
Your state’s laws may have specific rules governing asset distribution for LLCs. You can work with a local attorney, accountant, or tax adviser to ensure you’re in compliance.
How to dissolve an LLC FAQ
Are LLCs easy to dissolve?
Dissolving an LLC isn’t necessarily easy. Rules for dissolution vary by state, but the general steps involve notifying vendors and creditors, federal, state, and local tax agencies, and by filing notice with the state of formation. You can conveniently complete many of the steps required for dissolution online.
What is the difference between dissolving and terminating an LLC?
It depends on your state, but the distinction between an LLC “dissolution” and “termination” is largely technical. Dissolution generally refers to the formal decision and process of closing the business, while termination refers to the final, legal end of the LLC’s existence as an entity. Think of dissolution as a process, and termination as the end result.
Do I need to notify the IRS if I close my LLC?
When you file your tax return for your LLC, you need to check the box that indicates it’s your final return. If your LLC has employees, you will also need to file final payroll tax returns, issue final W-2s to employees, and submit final 1099s to contractors. You can also send the IRS a letter requesting cancellation of your EIN.
What are the cons of dissolving an LLC?
Dissolving an LLC can make it more difficult to restart the business later if you change your mind. You will need to go through the entire formation process again, and could risk losing rights to your LLC name. In addition to the costs of restarting your LLC, there are also expenses associated with winding down, such as filing fees for dissolution papers, expenses for final tax return preparation, or even severance pay for laid off workers.
What do I need to do before dissolving an LLC?
You need to take a number of steps before filing dissolution paperwork with the state, including voting on dissolution (for multimember LLCs), notifying creditors, canceling contracts, filing final tax returns, paying taxes, obtaining a tax clearance certificate, and notifying any relevant licensing authorities.
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