How to Dissolve an LLC Partnership
< View All PostsBusiness owners may want to dissolve their business for a variety of reasons. Some businesses form with a specific timeline for closure in mind. Other businesses are formed to address a particular need; once that need is met, the company is no longer necessary. Other businesses become financially unstable or are no longer profitable and, thus, must close their doors. No matter the reason for wanting to dissolve a business it is important to understand the process of dissolution.
What Does it Mean to Dissolve a Business?
A business dissolution is a formal closure of a business with the state. A business cannot simply decide to stop operations and no longer exists. Certain business forms, such as a limited liability company (also known as an LLC) must fully terminate the existence of their business by filing articles of dissolution with the state.
How to Dissolve a Business
The exact details of the dissolution process differ slightly from state to state and depend on the type of business. However, the overview of the process is largely the same, no matter the location of the business. This article will discuss the dissolution process for both LLCs and partnerships.
1. Limited Liability Companies
There are three types of LLC dissolutions:
1. Judicial dissolution
2. Administrative dissolution
3. Voluntary dissolution
Judicial dissolution is issued by a court and may be the result of a failure to comply with state laws, failure to pay taxes, or the result of a lawsuit brought by unhappy LLC members who wish to break their business agreement.
Administrative dissolution is imposed by the Secretary of State’s office and is generally the result of failure to comply with state law or failure to file an annual report. However, the Secretary of State generally has broad power, and an LLC can be dissolved by the Secretary of State for practically any reason.
Finally, voluntary dissolution occurs when LLC members willingly choose to close their business. Voluntary dissolution may occur in one of two ways: (1) a predetermined reason for dissolution, which is enumerated in the LLC’s operating agreement, is triggered, or (2) members cast a vote to dissolve the company.
To dissolve an LLC, you must file Articles of Dissolution with the Secretary of State. Once the Articles of Dissolution are approved the business is technically dissolved. However, this is not the end of the process. If your LLC conducted business in other states, you would also need to file the necessary paperwork in those states.
A final tax return must be filed with the appropriate state agency and the IRS (see the IRS’s Closing Business Checklist for additional filings that must be made with the federal government). You should also close your federal Employer Identification Number (EIN) and cancel any business licenses issued to the LLC.
Once the clerical tasks are taken care of there are still a few more steps that must be taken to fully dissolve your LLC. These measures are often referred to as “Winding-Up” the business. You will want to settle any creditor claims. Many states require you to notify outstanding creditors when you dissolve an LLC or even publish a dissolution notice in a local newspaper.
You will also need to distribute any remaining assets. Distribution of assets may be provided for in the LLC’s operating agreement, if not then assets will be distributed to LLC members according to the ownership percentage. Assets include profits, physical properties, and all financial investments. Finally, if your LLC operated out of a physical location you will need to take the necessary steps to close your business’s storefront.
2. Partnerships
Partnerships are not subject to as many formalities as an LLC. In fact, a partnership can be formed as easily as two or more people carrying on as co-owners of a business for profit. At the most basic level, no paperwork needs to be filed to form a partnership.
The inverse is true of the dissolution of a partnership, depending on the circumstances of the partnership. At the most basic level, a partnership can be dissolved by one partner providing the partnership with express notice of an intent to dissociate.
Of course, all of this can be altered by a partnership agreement. If a partnership has a partnership agreement, which expressly provides for dissolution, then dissolution is governed by the partnership agreement.
Even in the absence of a partnership agreement, it is generally a good idea to discuss dissolution with your partner(s) to avoid blindsiding the people you have been running a business with.
You may also need to (or at least you should even if not required in your state) file a dissolution of partnership form with the state your business is based in. This formally announces the end of the partnership and makes clear you are no longer in a partnership or liable for its debts.
Additionally, you should notify other parties of the dissolution. People who should be notified include employees, customers, your landlord (if your partnership operates out of a physical location), and government entities such as the IRS or any entity with which your partnership is registered or has been issued a license.
Finally, you will need to settle and close out all accounts, settle any remaining debts, and distribute assets. This process is similar to the “Winding-Up” process discussed with LLCs.
How Long Does It Take to Dissolve a Business?
As is likely evident from the discussion above, the formal dissolution process is not very lengthy. For LLC’s the formal dissolution process can be completed as soon as your state’s Secretary of State can process the paperwork. Partnerships can be technically dissolved even sooner; all it takes is a notice of intent to dissolve.
However, the dissolution process often takes more time and will vary depending on the size of your business and how long it takes to complete the “Winding-Up” process. One way to speed this process up is to provide detailed instructions for dissolution in an LLC’s operating agreement or a partnership agreement.
These predetermined dissolution procedures will govern the process and reduce the decisions that need to be made when it comes time to dissolve a business (which may be particularly helpful if dissolution is occurring due to a souring of the business relationship).
Can I Use a Dissolved Company Name?
In most states, once a business has been dissolved that business legally no longer exists. If you are forming a new business, you are free to use the name of a previously dissolved business without requesting permission from the dissolved business’s owner(s). However, if a business has yet to dissolve and is merely inactive or has stopped operations but has yet to dissolve, then you must obtain permission from a responsible party to use that business’s name.
Generally, the process of dissolution is not overly complicated. However, it is important for business owners who wish to close their business to understand the process of dissolution to avoid any future liabilities. It is also important to understand that once a business is dissolved that business ceases to exist, legally.
While it is possible to reform a dissolved business and laws vary state by state, the process is often the equivalent of forming a new business. You may even lose the right to operate under the business’s former name if a new business has registered with that name since your business dissolved. Therefore, dissolution is best reserved for businesses that wish to close and do not intend on reopening in the future.
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