If you filed for bankruptcy protection because your limited liability company couldn’t pay all its debts, you’ll feel a sense of relief when the bankruptcy proceeding is finally over.
But while a bankruptcy liquidates your LLCs assets and resolves its debts, it does not end your LLC’s existence. Even though it’s not doing business anymore, the LLC is still a legal entity until you take steps to formally dissolve it.
How Does Bankruptcy Work?
In a Chapter 7 business bankruptcy, the LLCs assets are sold and used to pay the LLC’s creditors. After the bankruptcy, the LLC’s remaining debts are wiped out and the LLC is no longer in business. The LLCs owners are generally not responsible for the LLCs debts.
Sometimes, however, an LLC owner signed a personal guarantee that makes the owner personally responsible for a business debt. Banks, landlords and other creditors commonly require personal guarantees when a business is new and has few assets. LLC owners who have signed personal guarantees may have to file personal bankruptcy to relieve them of responsibility for these business debts.
Sometimes a business bankruptcy is the best way to resolve an LLC’s financial troubles. If the LLC does not have any assets but the owner has signed a personal guarantee, a personal bankruptcy may be best. And sometimes it’s necessary to file both.
Why Formally Dissolve an LLC After Bankruptcy?
In the eyes of the state where an LLC was formed, the LLC continues to exist until it has been dissolved. That means that, depending on the state, the LLC may be expected to file annual reports, pay fees and pay minimum taxes.
If an LLC neglects to do these things, it can be subject to fines and penalties.
Dissolving an LLC allows it to avoid these requirements, fees, fines and taxes. It also places any remaining creditors on notice that the LLC can no longer incur business debts.
Disposing of Business Assets After a Personal Bankruptcy
If you filed a personal bankruptcy because you personally guaranteed business debts, but you did not also file a business bankruptcy, you will need to dispose of any remaining business assets before formally closing an LLC after bankruptcy. Tangible assets such as equipment and fixtures can be sold and the proceeds used to pay outstanding taxes and other debts.
How to Dissolve an LLC
Each state has its own rules and procedures for dissolving an LLC in that state. In general, however, you must complete the following steps:
The LLC’s members must approve the dissolution. The LLC’s operating agreement or other organizing document may specify a procedure for meeting and voting on a plan of dissolution. If not, you should follow the procedure outlined in the laws of the state where the LLC was formed. The members’ approval should be documented in a resolution and kept with the LLC’s records.
Once the dissolution is approved, dissolution documents must be filed with the state in which the LLC was formed. Each state has its own forms and procedures for dissolution. Dissolution documents are filed with the Secretary of State or other state agency that maintains business records.
In some states, an LLC cannot be dissolved until it obtains a certification from state taxing authorities stating that it is current on all its taxes. Even if this is not required, you should be sure your LLC has paid all its state taxes.
If the LLC has any remaining creditors that were not included in the bankruptcy, they should be notified of the dissolution. This is a requirement in some states.
If the LLC is also registered to do business in other states, dissolution or cancellation documents should be filed in every state where the LLC is registered to do business.
Other Steps to Take
LLC owners should notify the Internal Revenue Service that the business has been closed and ask the IRS to close the LLCs Employer Identification Number (EIN) account. The IRS has a guide to other tax-related steps you should take if you are closing a business.
When you formed your LLC, you were required to appoint someone to act as registered agent to receive lawsuits and other official documents on the LLC’s behalf. If you designated someone outside the company as registered agent, you should notify the agent of the LLC bankruptcy and dissolution. You should also notify agents in any other states where the LLC is registered to do business.
If your LLC holds any business licenses, you should notify the licensing authorities and find out how to cancel or surrender the license.
Closing an LLC after bankruptcy is a difficult decision, but there are resources to help business owners make the transition as smooth as possible. Once the process of filing business bankruptcy is complete, business owners are relieved from debt and given an opportunity for a fresh start.
Need help dissolving your corporation or LLC? Learn more about LLC dissolutions.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.