When the dissolution of your business is inevitable, there are multiple steps to undertake before officially closing the doors. Whether you’re looking to retire, try something new or have fallen on hard economic times, you usually can’t just walk away. The primary responsibility typically falls on the business owner(s) to shut down operations and liquidate remaining assets, while fulfilling fiduciary obligations and preserving professional reputations and personal relationships.
1. Following the rules
When closing a LLC, business owners should follow the rules of dissolution set out in the company’s Operating Agreement or, if no operating agreement exists, by applicable state default laws. Oftentimes, New York operating agreements include clauses that (i) allow for dissolution in certain predetermined situations or (ii) require a majority of the members’ affirmative vote before the dissolution process can begin. It’s important to follow any such procedures closely and accurately in order to avoid potential disputes with other owners in the future.
In New York, businesses without operating agreements are governed by New York’s LLC law, which allows for dissolution by vote or written consent of at least a majority of LLC members. Under NY LLC law, after a majority vote in favor of closure, the company may then begin the voluntary dissolution process.
Once in route to dissolution, it is prudent to begin the notification process as soon as possible. If the company has employees, it may be required to notify them under New York law and make payment of any earned wages or accrued benefits payable. Employee notification must done within the period of time required by state law, which generally varies depending on the size of the business.
Business owners should also notify all creditors, lenders, suppliers, vendors and service providers that the company will no longer be contracting with them. This way, the company can finalize outstanding payments or set up appropriate settlement schedules as necessary. Additionally, business owners may consider notifying other third parties whose business relationship will be affected, such as the landlord of company property and insurance carriers.
3. Settle and collect
Once all relevant parties have been notified, any current or pending claims against the company should be addressed. Generally, the company has to settle all unresolved claims before it can accurately determine what assets remain to be distributed among the owners.
It’s also a good idea to collect any outstanding receivables that the company is owed. Otherwise, if the company has not fully collected and dissolution is complete, it will likely be harder for the former owners to validate claims to their debtors when attempting to collect on behalf of a company that no longer exists.
4. Filing with the state and other federal and local agencies
If you filed with the state at the inception of the business, then you will also have to file to properly dissolve the entity. In fact, even if your business isn’t required to file, it’s still a good idea because filing puts creditors on notice of closing. This provides the company and its former owners with more protection against any debts or obligations that may be incurred after dissolution.
The process of filing for dissolution varies by state. In New York, business owners must file with the Department of State within 90 days of taking the initial action to dissolve the LLC. Note that once the LLC is dissolved, the business name becomes available for use by others.
At the close of business, the company is still liable for any taxes from prior and current years. In fact, some states even require that a tax clearance be obtained first. Essentially, the state’s tax authority must consent to the dissolution or verify that the company is in good standing. Although New York does not require tax clearance before dissolution, the New York State Department of Taxation and Finance suggests that companies follow the state’s dissolution process, which includes filing final tax returns in a timely manner. In addition to tax agencies, owners should file with local agencies to terminate any business licenses or permits that will no longer be in use.
Closing out an LLC can be a complicated process. It’s important to consider these and other steps before shutting down in order to insulate against potential claims and unexpected penalties and disputes.
This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.