Last Updated on April 22, 2023 by Ewen Finser
In the course of a business’s lifecycle, there may come a time when it becomes necessary to dissolve an LLC. Dissolution of an LLC is a routine process done to ensure that the assets and liabilities of the LLC are transferred to the respective parties.
If this is the case, it is important to make sure that you, the other LLC members, and managers understand the process. You need to know the legal implications of dissolving the LLC too. In this article, we will discuss what you need to know when you want to dissolve your LLC in Delaware and the steps to take to make the process smooth and affordable.
Reasons Why an LLC Can Be Dissolved
When an LLC is formed, it continues to exist until its owners decide otherwise. Ending a company’s existence may come in two ways – voluntary dissolution or involuntary dissolution.
Voluntary dissolution is when all of the members agree to end the LLC. An involuntary dissolution happens if a judge orders the LLC to dissolve because of one of two reasons. If it is no longer capable of fulfilling its purpose or has violated one of the statutes under which it was formed.
An LLC can be dissolved due to any of the reasons discussed below;
Disagreement Among Members
Dissolving an LLC may be the right choice if members cannot agree on important aspects of the company’s business operations. A common area of disagreement may be the amount of time they spend on the company, profit-sharing methods, or new directions for their business.
One way to dissolve the LLC is if the members agree that it is time to part ways. If they can not reach a consensus, you might be able to file for dissolution with the state court. This is possible if you can show how people who have authority over operations act in an oppressive and potentially harmful way.
Completion If It’s Intended Purpose
An LLC may be created for a specific purpose. For example, members may form an LLC to develop housing units. When the project is completed, or homes are sold, the business purpose is fulfilled. In this case, it would be best for the members to dissolve the LLC voluntarily.
Members of an LLC can form the company with a certain expiration date in mind. The date of termination of a business entity is an important detail. It can be given as a specific date or the occurrence of an event, such as the member named in the LLC’s formation document dying or filing for bankruptcy. If a member does not specify a date for the LLC cessation, the entity is considered permanent.
Members Voting in Favor of Dissolution
Some factors can trigger the members to vote in favor of dissolving an LLC. Some of them are: if the business is incurring losses, conflict among members or the management, or if there is a need to change the business structure of the LLC.
If an LLC will be shutting down, its management needs to call a vote. For the vote to be successful, a certain percentage of members need to vote to shut the company down. The voting requirement is specific to each company, depending on the rules outlined in the law that regulates that company. The article of organization and the written operating agreement govern voting percentages as well.
Death or Bankruptcy Among Members
An LLC may dissolve when it has no members. This often occurs if the sole owner dies. But if it has other members, they may have a say in whether or not the business continues to exist. For example, the operating agreement may require that the LLC dissolve in this situation. Although, the surviving members can vote to amend it by following an amendment process.
If you are producing an unsafe product, you will be unable to sell it. If you can’t sell it, how will you make your money? To avoid this, many business owners choose dissolution, which can protect them from liability claims.
What To Do Before You Dissolve Your LLC in Delaware
Before you dissolve your Delaware LLC, you need to take care of any pending issues that may bring problems later if left unresolved. Some of them are
- Pay all outstanding taxes, including franchise taxes, federal taxes, and any interests or penalties due
- Settle all outstanding liabilities from creditors, loans, or contracts
- Settle any pending lawsuits
- Terminate all your foreign qualification registrations if your LLC has been doing business in other states.
- Allocate any assets as outlined in your operating agreement
- Close your LLC’s bank accounts
How Much Does it Cost to Dissolve Your LLC in Delaware?
If you are interested in dissolving your LLC in Delaware, you need to complete either a Certificate of Cancellation or a Certificate of Dissolution. Either way, you need to file the form with the Secretary of State, which can be done in person, through fax, or by mail. The fee should be sent along with the form.
The fee for filing the certificate is $200. It usually takes two to three weeks to process. Expedited service can be obtained for an additional cost, but a basic form is available for free on the Secretary of State website.
How long does it take to dissolve an LLC in Delaware?
If you are looking to dissolve an LLC in Delaware, the time it takes can vary. What is important is that you complete all of the necessary actions on time. Once that is done, it typically takes about 5-7 business days for the Delaware Secretary of State to process the Certificate of Cancellation.
How To Dissolve an LLC in Delaware – Step by Step
Like all businesses, sometimes things don’t always go as planned. It comes a time when a limited liability company needs to be dissolved. A few steps are involved in dissolving an LLC. First, the company must formally terminate. This is not as simple as quitting doing business; there are important legal steps to take. Below are the steps to take to dissolve your LLC.
1. Members Vote to Dissolve
To dissolve a Delaware LLC, the company must hold a members’ meeting. Your LLC agreement lists the rules for how to dissolve a Delaware LLC. Delaware law also permits a dissolution to go ahead if two-thirds of members vote in favor of it. Members may vote in person or through a written ballot. After the vote is successful, a manager is appointed to start the dissolution process.
When it comes time to vote on dissolving your LLC, make sure you follow the rules in the operating agreement and Delaware’s LLC Act. If a final decision is made, be sure to document it. Written consent or a meeting memorializing your decision will work. Even if you are the only member of your LLC, make sure you register your vote.
2. File a Certificate of Dissolution With the State
After all the votes are in, the next step is to file paperwork with the state of Delaware. Make a note of all the other states in which you did business because you need to do the same there. Remember to cancel your licenses and permits too.
3. Pay Off Your Creditors
The liquidation manager should follow a specific order of priority. First, you should pay off current creditors and set aside enough funds to pay off foreseeable creditors over the next ten years. This way, members will receive their expected share of residual funds after all has been paid off.
4. Pay Off the Delaware Franchise Tax
Before you file the Certificate of Cancellation, you are required to pay any outstanding tax balance with the state. The franchise tax is a yearly charge that has nothing to do with the business’s income or how it operates.
If the LLC makes no money during the year, it still has to pay the franchise tax — and any penalties, back taxes, and interest to the Delaware Secretary of State. The company cannot be dissolved until all the outstanding franchise tax is settled.
5. Pay the Members of the LLC
After paying off the current and foreseeable creditors, the LLC members can pay themselves. The payments should be based on the allocations and pro-rata distributions as outlined in the LLC’s operating agreement.
6. File For a Certificate of Cancellation
A Certificate of Cancellation is the document filed with the Division of Corporations in Delaware to dissolve your LLC legally. You should file this document once your business has completely “wound down” and stopped all operations. The filing fee for the certificate is $200.
You need to send file the certificate of cancellation together with a cover letter and pay the filing fee. You can either send it by mail or file online. If you file your cancellation online, you won’t need to include a cover letter. Instead, you will manually input the information that is being requested on the cover letter on the state’s website.
7. Close Your Account With the IRS
When a multi-member LLC wants to close its federal tax record, the IRS can do so after filing taxes. The LLC should also send a final return to the State Division of Revenue for any state taxes due. In this case, the IRS should be contacted via a letter that includes the full legal name of the LLC, its Employer Identification Number (EIN), its address, and why it is closing the account – in this case, dissolution. You can include a copy of the original notice issued when the EIN was given if you have it.
Even though LLCs do not have their own taxes, most single-member LLCs file their single member’s Schedule C for self-occupational income on the individual’s Form 1040. On the other hand, partnerships need to file a final 1065 return along with state tax returns in states where they did business.
Pros and Cons of dissolving your LLC
- Dissolving an LLC can be a cost-effective way for some business owners to avoid the costs of liquidation, fees, and other expenses.
- Dissolving an LLC is a smarter choice than liquidating or appointing a receiver. A formal investigation into the conduct of members or management is avoided, which saves time and money.
- Your LLC will automatically be removed from the Secretary of state register, and you will not have to pay any state fees or taxes.
- Creditors may reject your application to dissolve the company since they have to approve the process. This could happen if you do not agree on how to settle your outstanding debts.
- For dissolution to be successful, the business needs to be debt-free which is not always the case. In extreme cases, you need to settle outstanding debts with all creditors in a satisfactory way to both parties.
- You may need to set aside some funds to take care of any unforeseen liability claims or outstanding payments for up to ten years. Such funds could be better utilized elsewhere.
Question: How much do I need to pay to dissolve my LLC in Delaware?
Answer: You have to fill out the certificate of cancellation form and pay a $200 fee. You will also need to contact the Delaware Department of State, Franchise Tax Section to make sure you have paid any taxes due on your company. You will need to include a check for any taxes owed at the time of the company’s cancellation.
Question: Can I revoke my decision to dissolve my LLC?
Answer: If you have dissolved the LLC but then want to revive it, you may do so within three years of the company’s dissolution date. You will need to make sure the name is not already taken by another company. If your LLC has been issued a certificate of dissolution and the name is no longer available, you will need to amend the name and file an amendment form with a filing fee to the Department of State.
Question: What happens to the LLC’s remaining assets and outstanding debts?
Answer: When an LLC dissolves, the members must handle any assets and debts it has left. Concerning the assets of a dissolved LLC, there are two options for distributing them:
• The members of the LLC may decide how to distribute them among themselves
• To follow the method of distribution as set out in the original operating agreement
• Outstanding debts must be paid too before dissolution. Alternatively, you need to agree on a payment plan with the creditors.
Question: What Do I do if I have other LLCs operating in other states that I need to dissolve?
Answer: If there are LLCs in other states tied to the Delaware LLC, you need to dissolve these foreign LLCs before the Delaware one is officially dissolved.
LLCs are always best served by planning for possible dissolution ahead of time. If the LLC fails to address dissolution in its operating agreement, state law will dictate how it occurs. This process can be difficult for all involved, but with careful consideration, it’s possible to address each company’s unique needs.
Dissolving an LLC is a straightforward process. The LLC operating agreement details what needs to happen when you stop performing. First, you need to get member consent (and follow the rules set out in the LLC agreement), then you can proceed with dissolution. You also need to file the Certificate of Cancellation with the state, and finally, if applicable, do your final federal filings.