Introduction: LLC Dissolution and How it Affects Your Business
LLC Dissolution is known by a few different names – usually either Articles of Dissolution or a Petition for Dissolution. Whatever your state calls the dissolution, it’s a legal document that allows a business to close permanently. Requirements vary by state, some even require tax clearance before an application can be processed. Failure to dissolve your LLC can lead to tax and legal problems in the future. You’ll also want to make sure open projects are finalized, vendors are paid in full, and all local and state paperwork are current (Annual reports, state tax filings, etc.) It’s also a good idea to be transparent with creditors and other members of your business during this time. Telling your business associates and acquaintances upfront that you’re closing shows them that you respect their positions and gives them an opportunity to fix any accounting issues or other things that affect your dealings with them. And who knows – someone you tell just might be interested in buying your business, which means you don’t have to dissolve at all! Whichever route you take, dissolving an LLC affects the business’ continued liability, so states and the IRS want to make sure all your local taxes are paid and your LLC is in good standing.
3 Reasons to Dissolve Your LLC or Corporation
- Some people dissolve their LLC or Corporation when they want to sell the business, but can’t find a new owner to take on the responsibility. It’s a wonderful thing to find someone who wants to purchase your company and take the reins, but if you can’t, there’s no point in keeping the company open and it’s time to dissolve.
- When a company has been inactive for over 12 months and there are no remaining assets, it can be legally dissolved. This process does not give the company any powers on its own- it’s essentially gone once it’s dissolved.
- Some people choose to dissolve a company because let’s face it – owning a business is not for the faint of heart! Believe it or not, many entrepreneurs return to the workforce after starting – and closing a company. The best-case scenario for the business owner is to file Articles of Dissolution to minimize tax and legal liability.
The Tax Implications of Dissolving Your LLC
Dissolving an LLC – or Limited Liability Company is a legal process and the best way to ensure that you and your business are following all of the state’s laws. In general, there are no tax implications for dissolving an LLC. That’s because a dissolved LLC is treated as a “termination” of a business and not a “liquidation” of a business. However, all assets will have to be liquidated and proceeds should be distributed to the members. Any profits from the liquidation will be taxed on each member’s final tax return for the last year the business operated.
Some tax implications of dissolving an LLC depend on how long you have been in business. If you’ve owned your LLC for less than 12 months, there are no taxes due at all. If you’ve owned your LLC for between 1-2 years, then when it’s dissolved, any income that was generated through passive sources will be subject to self-employment taxes.
The dissolution process is more than just closing down your LLC. It also includes filling out paperwork to officially terminate the company’s status in the eyes of the state. Once the LLC is dissolved, you’ll be taxed as an individual and no more business reporting will be required.
What Happens After I File My LLC’s Final Tax Return?
A final tax return is necessary for an LLC to close its business operations and file any additional taxes owed to the IRS. The LLC’s final tax return is submitted by your company’s tax preparer. It will include all of the income and deductions from business operations in a year, and how much the company owes in taxes. The final tax return needs to be filed when your company dissolves or when you plan on liquidating all of your assets. When that happens, you need to file your final tax return with the IRS for any outstanding taxes owed.
Conclusion: The Dos and Don’ts of Dissolving an LLC or Corporation
We can help you dissolve your LLC or corporation with a minimal amount of hassle and at a low cost.
The following are some dos and the don’ts of dissolving a company:
DON’T forget to dissolve the company! It is often overlooked but it is an important step that needs to be taken before you can close up shop.
DON’T forget to complete all pending work including finalizing any projects, paying off any outstanding debts, and filing all necessary paperwork.
DO be transparent during the dissolution process so that there are no surprises for creditors or shareholders.
DON’T try to conceal assets or sell them below market value without disclosing this information beforehand.
DO consider transitioning the business as opposed to dissolving it entirely. There are many options to sell your business and it may even be easier than liquidating on your own.
MyCompanyWorks LLC Dissolution Service
We can file Articles of Dissolution for you, and document e-delivery is free. Click here to get started and see processing time in your state or contact us for more information.
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