How to Close an LLC (or Other Business Type)

When Should a Business Close?

People often associate closing a business with failure, such as when a business goes bankrupt and files for Chapter 7 bankruptcy. However, it doesn’t always have to be something negative. A business owner may simply decide to move on to something else, such as starting a new venture or retiring. In some cases, closing the business could be a better option than selling it.

The process for terminating a business may involve two separate steps: first, you must wind up and close the business itself. Then, if you have a formal business entity, like an LLC, you must file paperwork to dissolve it.

How to Close an LLC

 

1. Approve Closure of the Business

A “triggering event” is necessary for the closing and dissolution of a business. The business owners may decide to close it. A company’s Operating Agreement or Bylaws may include rules for voting on closure. If not, state law will determine how the owners should proceed.

A company’s governing documents may also define other triggering events, such as:

• A limited duration for a business.
• Fulfillment of the business’s purpose.
• The death of a key partner or owner.
• Bankruptcy.

2. Give Notice to Creditors

The business should notify creditors and others who might have a claim against the company. This might include customers with outstanding contracts. Everyone will expect the business to fulfill its obligations—unless the company is filing for bankruptcy, it cannot get out of its contractual obligations without facing lawsuits.

Some states’ statutes provide that if creditors don’t make a claim within a certain period after notice, they lose the right to pursue it. That’s why notice is so important—it can “cut off” future claims.

3. Wind Down the Business

Once a triggering event has occurred, the business must stop operations. It can fulfill existing contracts, but it should not get any new clients, customers, sales, or other obligations. Other important issues to consider when winding up might include:

• Paying outstanding debts to creditors.
• Laying off employees and paying severance.
• Canceling business permits and licenses.
• Terminating leases for office space, other real estate, and equipment.
• Shutting off utilities.

The purpose of the winding-up process is to tie up all loose ends before the business formally ends. This can help ensure no one will have legal claims against the business. After all, if a business leaves a loose end untied, the individual owners could be liable once the business is dissolved.

4. Pay All Business Taxes

The business should pay all federal, state, and local business taxes. This may include:

• Federal and state income tax.
• Federal employment taxes, including payroll taxes and employee withholding.
• State sales tax.
• State franchise tax.
• State and local permit fees.

Many types of taxes require a final return from the business, which indicates that the business is closing. 

5. Liquidate or Distribute Assets

The order of asset distribution is usually set by state law and/or the company’s Operating Agreement and Bylaws. The owners may then decide to sell those assets and split the cash, or they might divide other business property among themselves. 

How to Dissolve an LLC

Once the business is closed, all that remains is to dissolve the business entity. State law governs business dissolution, but most states have fairly similar procedures, such as:

1. Obtain a Tax Clearance Document

Many states require a tax clearance as part of business dissolution. This is a certificate or letter from the state comptroller declaring that the business has no outstanding tax debt.

2. File Articles of Dissolution

The final step in closing a business is to file Articles of Dissolution. Each state has a Secretary of State’s office that processes business filings. The name of the document may vary by state, and there might be a filing fee to keep in mind.

What to Do After Closing Your Business

You might not be finished with your business even after you close and dissolve it. The business might have had creditors or other obligations that were missed. It might even have income still coming in from customers, tax refunds, or other sources. Keep an eye out for anything that could affect the business for at least a few years.

• Unpaid Obligations
  State and federal laws set time limits for filing different types of lawsuits. This is known as the statute of limitations. The statute of limitations for breach of contract, for example, typically ranges from three to six years. During that time, the business could still face legal liability. 
• Undistributed Assets
  If you find business assets after closing the business, you might need to use them to pay outstanding debts. Otherwise, you may once again distribute them to the owners.

Closing a business involves more than just stopping operations — it requires careful steps to protect yourself legally and financially. If you're unsure how to navigate the process in your state, a Rocket Legal Pro can help you meet all the requirements and close your business the right way.

 

Key takeaways Closing a business typically has two parts: winding up business operations and dissolving the business entity. Winding up the business involves closing out all ongoing work, paying creditors and taxes, settling all other business, and liquidating assets. Dissolving the business requires filing a document that formally ends the business entity’s existence.

Additional resources

Learning how to enforce a contract is just one step. Explore these additional topics to learn more and take the next steps.

• What are Articles of Dissolution