How to terminate an LLC: Dissolution, winding up, and termination

Limited liability companies (LLCs) have a lifecycle. They’re formed, they do business, and they terminate. And while it’s true that LLCs have a right to exist forever — an entity characteristic known as perpetual duration — the fact is, many will one day terminate.

Key Takeaways

• LLC owners who no longer need their LLC should formally terminate its existence
• Until termination the LLC has to comply with state laws and can be penalized for a failure to do so
• Dissolution and termination are steps that require compliance with LLC laws and the operating agreement

The multi-step process of ending an LLC’s existence

Ending an LLC’s existence as a separate legal entity is a multi-step process that involves dissolving, winding up affairs, liquidating assets, paying creditors, and more. This process requires compliance with the formation state’s LLC Act and the LLC’s operating agreement.

Many operating agreements specify how and when this process will work. If an agreement doesn’t cover these provisions, the statute’s default provisions must be followed. This is why having a written operating agreement is important. The statutory default provisions may not reflect what the members want. Also, the statutes have certain requirements that must be complied with that cannot be altered by the operating agreement.

LLC dissolution: The beginning of the end, but not the end itself

What is dissolution of an LLC? (Dissolution vs. termination) The first step in the termination process is to dissolve the LLC. Although some people confuse dissolution and termination, dissolution does not terminate an LLC’s existence. Dissolution changes the purpose of an LLC’s existence. Instead of conducting whatever business it conducted before, a dissolved LLC exists solely for the purpose of winding up and liquidating.

The triggering event. Dissolution begins with a “triggering event”. This is an event, act, or occurrence that requires the LLC to stop doing regular business and start winding up. The triggering event may be set forth in the operating agreement. Take, for example, an LLC formed for a specific purpose, such as holding a piece of property until it’s sold. Its operating agreement may have a clause saying the LLC must dissolve upon the sale of the property. The triggering event may also be a vote of the members.

CT note: While this article is addressing voluntary dissolution and termination, it may be noted that the LLC statutes also provide for administrative dissolution for LLCs that fail to comply with certain compliance requirements and for judicial dissolution under certain circumstances.

Member vote. Often, an LLC's dissolution is triggered by a vote of the members. Before a vote is taken, it is important to read the operating agreement. It may set forth the number or percentage of members who must approve dissolution. The agreement may also require a meeting to be held, notice to be given, and other formalities.

If the operating agreement doesn’t deal with these issues, then the default provisions of the formation state's LLC Act govern. State laws vary. For example, some require a unanimous vote for dissolution, while others require a two-thirds or majority vote. In some states, the votes are based on the number of members, some on the percentage of ownership interests. And there are some state LLC laws without default formality requirements.

Filing a document. Many states require a document to be filed when an LLC dissolves. This document is typically called articles of dissolution. It includes the LLC’s name, its formation date, the fact the LLC is dissolving, and the triggering event. Once this document takes effect, the LLC is considered dissolved and must stop doing its regular business and start winding up.

Winding up an LLC: Necessary, but not simple

What the statutes say. Once the LLC is dissolved, the members (or managers, if the LLC is manager-managed) must begin winding up its affairs. In regard to what “winding up” means, LLC statutes broadly describe what must be done. There are three main tasks:

• Discharging the LLC’s debts, obligations, and other liabilities
• Settling and closing the LLC’s activities and affairs
• Distributing the remaining assets

What typically has to be done. Winding up is not simple. There are many things to do, and they will differ for each LLC. However, they often include the following:

• Notifying creditors that the LLC is dissolved
• Closing out bank accounts
• Canceling business licenses, permits, and assumed names
• Paying creditors or establishing reserves to pay them
• Paying taxes
• Filing final tax returns and reports
• Withdrawing from states in which the LLC was registered as a foreign LLC

Paying taxes. Part of the winding up process is paying taxes. No state will allow an LLC’s existence to terminate before it has paid its state taxes. Some states require proof that taxes have been paid. This is generally called a tax clearance requirement. Upon request, the state tax department issues a document stating that no taxes are due. This document must then be filed with the Secretary of State (or other business entity filing office).

And then what? The final step is to distribute any remaining assets to the members. Check the operating agreement. It may set forth who gets what.