Closing your Delaware limited liability company (LLC) will involve a variety of tasks. Among the most important are what is known as dissolving and winding up the business.
Dissolving Your LLC
Your LLC is registered with the State of Delaware. Officially ending its existence as a state-registered business entity, and putting it beyond the reach of creditors and other claimants, begins with a formal process called dissolution. While an LLC may be involuntarily dissolved through a court decree, this article covers voluntary dissolution by the LLC members.
In order to voluntarily dissolve your LLC, you first should look to your LLC agreement. In most cases, it will contain a section with rules for how to dissolve the company. Typically the rules will require a vote of the LLC members on a resolution to dissolve, and more specifically a requirement that some percentage of members vote in favor of the resolution. Make sure you follow any specific procedural requirements that may be part of the dissolution rules, such as setting a specific time to meet and vote and giving advance notice to all members regarding the meeting.
Also, unless your LLC agreement provides otherwise, Delaware’s LLC Act allows for an alternative method to voluntarily dissolve an LLC: affirmative vote or written consent of members who own more than two-thirds of the current percentage or other interest in the profits of the company.
For either approach to dissolution of your LLC—relying on rules in your LLC agreement or on greater-than-two-thirds vote or written consent—you should make sure to record the decision to approve the dissolution in the official minutes of the dissolution meeting or on a written consent form.
Following dissolution, your LLC continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as winding up the company. You may choose to designate one or more LLC members or managers to handle the winding up.
Under Delaware’s LLC Act, key winding up tasks include:
- prosecuting and defending lawsuits
- settling and closing the LLC’s business
- disposing of and conveying the LLC’s property
- discharging or making reasonable provision for the LLC’s liabilities; and
- distributing to the members any remaining LLC assets.
When it comes to discharging LLC liabilities, the LLC Act more specifically states that an LLC:
- shall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured contractual claims, known to the limited liability company
- shall make such provision as will be reasonably likely to be sufficient to provide compensation for any claim against the limited liability company which is the subject of a pending action, suit or proceeding to which the limited liability company is a party; and
- shall make such provision as will be reasonably likely to be sufficient to provide compensation for claims that have not been made known to the limited liability company or that have not arisen but that, based on facts known to the limited liability company, are likely to arise or to become known to the limited liability company within 10 years after the date of dissolution.
In short, the Act suggests a broad range of potential claims, both in terms of contingency and in terms of timeframe (10 years), that you must provide for.
Regarding discharging LLC liabilities and making distributions to LLC members, you are required to make payments in a particular order. First, you must pay creditors, including LLC members who are creditors, to the extent permitted by law. (It is particularly important that you pay all outstanding taxes.) Next, unless otherwise provided in your LLC agreement, you must pay current and former members any required interim distributions and any distributions due to resigned members. (Interim distributions generally are approved payments to members unrelated to dissolution.) Finally, unless otherwise provided in your operating agreement, you must distribute any remaining assets to members and former members (a) for the return of their contributions to the LLC; and then (b) in proportions in which the members generally share in distributions.
Certificate of Cancellation
After dissolving and winding up your LLC, you must file a certificate of cancellation with the Secretary of State (“SOS”). The certificate must include a few pieces of basic information about your dissolved LLC, including:
- the name of the LLC
- the date of filing of the LLC’s certificate of formation; and
- the effective date of cancellation if other than the filing date.
The certificate of cancellation cancels your LLC’s certificate of formation.
There is a $200 fee to file the certificate. Your filing usually will be processed in 2-3 weeks. Various forms of expedited service are available for additional fees. A basic certificate of cancellation form is available for download from the SOS website.
Be aware that your business name will become available for use by others after cancellation.
Delaware does not require that you obtain tax clearance before dissolving your LLC.
For federal tax purposes, check the “final return” box on your IRS Form 1065 (if your LLC is classified as a partnership for tax purposes) or IRS Form 1120 (if your LLC is classified as a corporation for tax purposes).
Is your LLC registered or qualified to do business in other states? If so, you must file separate forms to terminate your right to conduct business in those states. Depending on the states involved, the form might be called a termination of registration, certificate of termination of existence, application of withdrawal, or certificate of surrender of right to transact business. Failure to file the additional termination forms means you’ll continue to be liable for annual report fees and minimum business taxes.
You can find additional information, such as forms, mailing addresses, and filing fees, on the SOS website.
For information on dissolving and winding up LLCs formed in other states, check Nolo’s 50-state series on dissolving LLCs.
Final Advice: Dissolving and winding up your LLC is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.