Dissolving an LLC starts the process of closing a business. When you file to dissolve your LLC in a state, it is called dissolution. In contrast, termination occurs when the state cancels or terminates your company, ceasing its legal existence. Termination is the final step that follows dissolution.
Dissolution vs Cancellation
Dissolution is the legal process of terminating an LLC, while cancellation occurs when a state-issued business license or permit is revoked due to noncompliance with regulations or statutes.
After you close your LLC in California, that LLC shall be canceled, and you can no longer conduct business using that LLC.
For federal income tax purposes, the consequences will vary depending on whether you were the only owner or if there were other owners.
What Happens if an LLC Is Not Dissolved?
Failing to dissolve an LLC allows third parties to continue to pursue legal action as if it were still in operation. If a company is not dissolved, it continues existing legally, remaining subject to requirements like annual reports and taxes. Officially dissolving puts creditors on notice that the company can’t incur new debts.
After the dissolution, a company will liquidate assets it owns. However, you cannot liquidate collateral pledged for loans.
If a company is inactive, it may still incur fees. Some states will dissolve an LLC for nonpayment of these fees. As part of winding down, you should settle debts, file a final tax return, and cancel your EIN.
To protect your finances and reputation, it is essential to file the necessary dissolution paperwork. Services like LegalZoom can assist with this for a starting fee of $129 plus additional fees.
Managing Inactive LLCs
An inactive company status, whether due to voluntary dissolution or conversion, may allow the name to be reused. However, ‘inactive’ usually means that no transactions have taken place in a year.
To safeguard your interests, it is crucial to properly dissolve entities and cancel any unneeded registrations and licenses.