If you are the owner or manager of a corporation or LLC and you’ve decided to stop doing business, you may be wondering how to officially close your business.
The answer will be different depending on whether you will no longer be doing any business anywhere, or whether you are just closing up the business in a state in which your corporation or LLC is registered to do business. If you no longer need your corporation or LLC at all you should dissolve and terminate it. If you only want to stop doing business in a “foreign” state, you should withdraw it from that state.
How do dissolution and withdrawal affect a business’s legal existence?
Corporations and LLCs have one state of formation. But they can do business in every other state. (Every state other than the formation state is considered a “foreign” state). Dissolution is the first step that is taken to terminate the existence of a corporation or LLC. Once a corporation or LLC has approved its dissolution, it no longer can conduct its regular business. It can only conduct the activities necessary to wind up its affairs, liquidate its assets, and distribute any remaining assets to its owners. After that is completed, the corporation or LLC no longer exists. The process is governed by the law of the formation state and will require a filing or filings with the formation state before the corporation or LLC’s existence is terminated.
When a corporation or LLC stops conducting business in a foreign state in which it has registered or qualified to do business, it can withdraw from that state. Withdrawal requires filing a document with the foreign state. Withdrawal removes your company’s right to do business in the foreign state but does not affect its existence as a legal entity.
Why should you withdraw from a foreign qualified state?
If your corporation or LLC stops doing business in a state in which it has qualified to do business, it is not required by law to withdraw. But if it does not withdraw, it continues to be subject to the compliance requirements of the foreign state’s corporation or LLC law, such as having to file an annual report, pay franchise taxes, and maintain a registered agent and office. And there are penalties that the state can impose for non-compliance. So, it’s best to withdraw from states where your qualified LLC or corporation is no longer doing business.
Always refer to the state’s corporation or LLC statute. This can help you determine what steps you must take to “withdraw” from that state.
For more information, see Compliance smart chart: State-by-state requirements for voluntary withdrawal of foreign corporations and LLCs and What should a company do when it stops doing business in a foreign state.
What are the steps for withdrawal?
Withdrawal from a state where your business is foreign qualified typically involves the following:
- Paying all fees and taxes due
- Filing all reports due
- Filing an application for withdrawal (often referred to as a Certificate of Withdrawal) with the filing office
Why do you need to formally dissolve a business?
Never just abandon an LLC or corporation just because you are no longer in business. If your LLC or corporation is not properly dissolved, it will continue to exist as a legal entity under state law. As such, you would still need to comply with corporation or LLC filing requirements, such as annual reports and franchise taxes.
Failure to do so could result in fines, taxes, penalties, and other liabilities — some of which could extend to you personally.
Another risk is business identity theft. Identity thieves scour government websites searching for corporations or LLCs listed as delinquent, suspended, or administratively dissolved for failing to comply with the state’s requirement. It’s relatively easy for these bad actors to take steps to place a business back into good standing or reinstate it if it’s already been administratively dissolved. And it’s become even easier as the states shift to online filings and online public databases.
Even more worrisome is that this can be done without your knowledge. If this occurs, the criminal has the authority to act on behalf of your company, including applying for new business loans or lines of credit and signing new contracts. Business identity theft can also threaten the personal liability protection afforded by the LLC or corporate structure — making you liable for any debts incurred by identity thieves.
Does the dissolution process differ for LLCs and corporations?
Although the statutory requirements vary somewhat from state to state, the dissolution of a corporation or LLC generally is the same for both. It is also important to review the governing documents, such as a corporation’s articles of incorporation and bylaws or an LLC’s articles of organization and operating agreement, to see if they have any provisions regarding the dissolution process that has to be complied with.