Dissolving an LLC
Dissolving an LLC does not absolve its debts. Winding up involves discharging debts. As an owner, properly dissolve under state law to avoid liability, including paying business debts. Creditors get paid first from assets. Follow state dissolution process:
- Majority vote to dissolve
- File paperwork
- Liquidate
- Pay creditors
- Distribute assets
Using a DBA assumes obligations, but an LLC can use one. Frustrated contracts discharge automatically.
Creditors’ Rights and Asset Distribution
Dissolving indebted companies can harm creditors. They took financial risks and want repayment. Creditors have collection rights depending on the state. Without settlement, companies risk further collection and lawsuits.
Distributing assets, updating taxes, confirming debt payment ability, and closing over three months dissolves companies. If debts remain, creditors likely restore the company register. That leaves directors open to misconduct claims since they should know finances. Insolvent liquidation may follow.
Dissolved LLCs can still get audited for years and owe state taxes until formally dissolved. The IRS cannot cancel an LLC’s EIN. Filing Articles of Dissolution is an LLC closure step, notifying creditors it closed and owners are no longer liable. State laws dictate dissolution paperwork deadlines and asset distribution rules. Some states require paying remaining taxes first.
Liability and Limited Liability Entities
Are LLC owners liable for debt? A limited liability company legally separates owners from company debt. The LLC assumes responsibility, not the members. Their personal assets stay protected.
What does limited liability mean? Forming a corporation or LLC creates an independent entity. The business itself holds assets, enters contracts, and owes its own debts. Members enjoy legal shields from obligations.
Can LLC members lose limited status? Yes, members guaranteeing debts or failing to pay taxes open personal liability. Their actions effectively forfeit protections.
If a member lends to an LLC, is the interest income? The IRS taxes interest earned on loans to an LLC. Principal repayments don’t count as income. Interest qualifies as a business expense for the company.
What happens if an LLC lacks assets or earnings? State laws only let creditors pursue LLC property for repayment. But contributed member assets transform into company assets usable for debts. Profit distributions can also be intercepted.
Can personal creditors seize LLC assets? Yes. If a member holds personal debts, their creditors can take company property to satisfy them. Limited liability shields don’t apply.
Who pays if an LLC closes with debt? Members don’t shoulder company debt after dissolution. Creditors can only claim LLC assets. However, any member capital contributions qualify as assets.
LLC Dissolution Steps
Initial Procedures. The first step is filing paperwork with the state where the LLC formed. This notifies them the LLC intends to dissolve. The state may require paying remaining taxes first.
You must then notify all creditors of the dissolution and allow them to file claims. Known creditors get paid first from company assets when liquidating.
If dissolving due to insolvency, carefully proceed. In theory, creditors can only pursue LLC assets, not personal assets. But if assets are limited, it’s best to file bankruptcy and allow courts to prioritize payments. This avoids problems with unsatisfied creditors.
You must also file final tax returns, distribute remaining assets to members, and close operations.
What happens if sued after dissolution? If the LLC did not dissolve properly per state laws, it can still get sued until it officially ceases. Limited liability protection may no longer apply either.
To dissolve properly:
- Pay known creditors first
- File articles of dissolution
- Notify suppliers
- Distribute assets
If steps not followed, liability risks continue.