Dissolving a Single-Member Limited Company: Step-by-Step Guide

If you're thinking of closing your LLC before the year ends, you may be feeling overwhelmed. And you are probably wondering what you must do to exit the business without leaving any loose ends behind. Indeed, there is more to shutting down a business than merely ceasing to sell products and services. The exact actions a Limited Liability Company's members must take depend on where the business is registered, whether it has employees on its payroll, and other factors. It can be tricky to determine all the requirements, so LLC owners (a.k.a. members) should carefully research the things they must do. I also recommend getting guidance from an attorney, accountant, and tax advisor so that no legal and financial details are overlooked. So, What do the steps to dissolve a single-member limited company mean? ACC Group will address your question. 

1. What are the steps to dissolve a single-member limited company?

Dissolving a single-member limited company involves several steps, which may vary depending on your jurisdiction and the specific circumstances of your company.

2. Confirm the Company Is in Good Standing

Before dissolving an LLC from the states where it conducts business, the business entity must be in good standing in those areas. Have the LLC members kept up with ongoing business compliance tasks or has it fallen behind on filing reports and paying fees?

If an LLC has fallen out of good standing, it will need to follow the state's rules for restoring that status (possibly even filing for reinstatement) before its owners can proceed with dissolving the entity.

3. Hold a Vote to Dissolve the Business

Depending on the state's laws and the rules outlined in the LLC operating agreement, it may require a majority vote or unanimous consent to approve the dissolution of the company. During the meeting to vote on this significant decision, the results must be captured in meeting minutes. Even if the company is a single-member LLC, holding a meeting and recording a vote (yes, with just that one member!) is advised — and may be required.

4. File LLC Articles of Dissolution

Limited Liability Companies must file a form called Articles of Dissolution (which might instead be called Certificate of Dissolution or Certificate of Termination) with the state's Secretary of State office (or other agency per the state's rules). It's critical to complete the form correctly to prevent processing delays that could result in unexpected costs and other issues.

If an LLC had requested foreign qualification to do business in states other than its home state, it must notify those states. Then, it can cancel any registrations, licenses, permits, business names, and anything else it may have applied for in those jurisdictions. Different states have different rules for what's required to withdraw from doing business there. Typically, removing a foreign LLC involves filing a withdrawal application and paying a filing fee.

Dissolution of an LLC usually is considered effective on the date specified during the LLC member vote. The business may continue to wrap up its affairs (e.g., notify vendors, customers, creditors, liquidate and distribute its assets, etc.). In some states, businesses may specify an effective dissolution date up to 180 days in the future. However, backdating dissolution to an earlier date is not an option.

Note: Filing dissolution paperwork will automatically cancel an LLC's legal business name in the state. However, if the LLC had filed a fictitious business name (a.k.a. DBA), it may have to take additional measures to cancel that name.

5. Notify the Company's Stakeholders

Some states require that LLCs notify their creditors and vendors of their dissolution before filing Articles of Dissolution. Also, some states require that businesses publish notice of their dissolution in a newspaper or other publication within a certain period of time. These tasks help ensure that the general public and creditors are aware that the company is going out of business.

Of course, it's polite to let customers when a business is closing too, so follow up on outstanding accounts receivables and provide notification of changes to your customer's accounts payable departments.

6. Cancel Business Licenses and Permits

If an LLC has obtained business licenses and permits, members should inform the appropriate licensing agencies that the company is closing. Examples of these include zoning permits, professional licenses (e.g., attorney, registered nurse, accounting, psychologist), seller's permits, retail food licenses, and salon licenses.

Failure to cancel licenses could mean being on the hook to renew licenses even though the company no longer conducts business activities.

7. File the LLC's Final Payroll Taxes

If an LLC has employees, it must follow through on its payroll tax registration responsibilities. The company must submit its state payroll forms and pay its taxes (SUI and SIT) after paying its workers for the final time. Companies that don't have funds to pay their employment taxes in full may be able to set up an installment plan or "offer in compromise" (approval to pay less than the total amount owed to settle the tax debt).

Limited Liability Companies must also issue IRS Form W-2 (Wage and Tax Statement) to each employee for the calendar year when they have final wages and salaries. Similarly, they must issue IRS Form 1099-NEC (Nonemployee Compensation) to independent contractors to whom they've paid at least $600 in the year the LLC is closing.

8. Pay Final Sales Tax

An LLC that sells taxable products and services must submit its final state (and local, if applicable) sales tax forms and payments. After that's done, it may close its sales tax accounts.

9. File Final Income Tax Returns

Business owners also have some ends to wrap up when closing an LLC with the IRS:

• A multi-member LLC must file its final Form 1065 (Return of Partnership Income) for the year the business is closing. According to the IRS, owners should check the box that indicates it is a final return. Likewise, LLC members should check the "final return" box on their Schedule K-1 form (Partner's Share of Income, Deductions, Credits, Etc.).
• A single-member LLC's owner must file their Form 1040's Schedule C (Profit or Loss from Business) with their individual tax return for the year the business is closing.
• If the business has any employees, it must pay its final federal tax deposits and report employment taxes (Form 941, Employer's Quarterly Federal Tax Return or Form 944, Employers Annual Federal Tax Return).
• The LLC must follow the jurisdictions' procedures for reporting and paying final income tax at the state and local levels. There may be various forms required at the federal, state, and local levels, depending on the circumstances. Because the rules and processes vary depending on the jurisdiction and type of business, it's helpful for business owners to talk with a tax professional for guidance.

10. Sell Company's Assets

Liquidating and selling an LLC's assets and inventory can enable the company to generate cash before it closes. A business facing financial difficulty could find this especially beneficial if it otherwise wouldn't have sufficient funds to cover outstanding debts and creditor claims. Business owners may find a qualified appraiser's expertise helpful in determining the value of physical assets (like furniture, equipment, etc.).

Q&A

1. How do I start the dissolution process for my single-member limited company?

To initiate the dissolution of your single-member limited company, you should typically begin by drafting a board resolution or a similar document that formally decides to dissolve the company. Since you're the sole member, you'll act as both the director and shareholder, making this decision yourself.

2. What are the key financial steps to consider during the dissolution process?

During the dissolution process, it's important to clear all outstanding debts, taxes, and liabilities of the company. This includes settling any loans, vendor payments, and tax obligations. You should also liquidate the company's assets, if any, and use the proceeds to pay off debts or distribute them to yourself as the sole member.

3. Are there any legal requirements for dissolving a single-member limited company?

Yes, there are legal requirements that may vary by jurisdiction. You typically need to file articles of dissolution or a similar document with the appropriate government authority to officially terminate the company's existence. This is a critical step, and you should follow the specific procedures and requirements outlined by your state or country.

4. What professional assistance should I seek when dissolving my company?

It's advisable to seek professional guidance when dissolving your single-member limited company. Consider consulting with a lawyer and an accountant who are knowledgeable about the relevant laws and regulations in your jurisdiction. They can help ensure that you meet all legal and financial requirements, making the dissolution process smoother and more compliant with the law.