In the excitement of starting a business, no one wants to think about ending it, but knowing how to make a safe exit, as well as a grand entrance, is a skill every startup founder should have. Most startup founders will have to close a business at some point in their careers. Here are a few tips on how to do that, if your business is organized as an LLC.
The closing of an LLC generally takes place in three steps: First, a “dissolution event” occurs; second, the business of the LLC is wound up; and, third, the existence of the LLC comes to an end. The most important thing to remember, when closing an LLC, is that dissolving an LLC is not the same as terminating its existence; it’s just the first step on the road to termination.
An LLC is dissolved upon the occurrence of certain events described in the applicable state LLC statute and in the LLC’s operating agreement. Since every LLC operating agreement is different, the events that will cause any particular LLC to dissolve are unique to that LLC. Consequently, the first step in closing an LLC is to review its operating agreement, as well as the applicable state LLC statute, to determine what events will cause that particular company to dissolve. These events often (but not always) include a vote by a certain percentage of the members to dissolve the LLC, the sale of substantially all of the LLC’s assets and/or a judicial decree ordering the LLC’s dissolution.
Sometimes, a review of an LLC’s operating agreement and the applicable state statute will reveal the fact that an event has already occurred that has dissolved the LLC. For example, your LLC may have already sold substantially all of its assets, and your operating agreement may state that such a sale automatically dissolves the LLC. In other cases, you may still need to take some action, such as having your members vote, to cause the dissolution of your LLC.
Once you have dissolved your LLC, the next step in closing your business is to “wind up” your company’s affairs. “Winding up” includes such actions as collecting outstanding accounts receivable, paying company taxes and debts, cancelling company permits, licenses and fictitious business names, and selling company assets. It does not include activities, like bringing in new business, that are more properly associated with a company that is growing, rather than ending.
Most LLC operating agreements, as well as state LLC statutes, provide details on exactly how an LLC’s business must be wound up, often identifying a specific person, such as the LLC’s manager, who will handle this process. State statutes and LLC operating agreements also, in many cases, specify the order and form in which the LLC’s assets will be distributed to creditors, members and other claimants. Consequently, you should review both your company’s operating agreement and the applicable state LLC statute before you begin the “winding up” process.
You should also be aware that, as part of the “winding up” process, an LLC may (but is usually not required to) send notices to known claimants and/or publish a notice of dissolution in a newspaper to extinguish certain known and unknown claims against the LLC. These notices provide an additional layer of protection to the LLC’s members, who might otherwise be personally liable for some or all of these claims, after the LLC has ceased to exist.
Once an LLC has been legally dissolved, Articles of Dissolution (or, in some states, a Certificate of Dissolution) should be filed with the appropriate state agency (in Wisconsin, the Department of Financial Institutions; in Illinois, the Secretary of State). In Wisconsin, these Articles can be filed at any time after your LLC is dissolved; in other states (including Illinois), you have to wait until the “winding up” is completed. You may, in some states (but not Wisconsin) also need to obtain a “tax clearance” or “consent to dissolution” from the appropriate state agency, or the tax status of your LLC may simply be checked by the applicable state agency, before your Articles of Dissolution will be accepted for filing.
When the winding up of your company has been completed, and all of the assets of your company have been distributed, your company will cease to exist as a legal entity, and you will have, officially, closed your business. At that point, you will be able to move safely on to your next new venture, building on the lessons you learned from your previous business but unburdened, at least for the most part, by the fear that some task left undone for your old business will come back to haunt you in your new one.
Please note: The closing of a business in connection with a bankruptcy is beyond the scope of this article. The purpose of this article is only to address a situation in which a group of founders have decided, voluntarily, to close their business.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B., cum laude, from Harvard University and a J.D, cum laude,. from Harvard Law School. She is a startup lawyer and the owner of The Gauthier Law Group, LLC, a boutique startup law firm in Milwaukee, Wisconsin, that represents founders, entrepreneurs, startups and early-stage businesses in Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.
© 2014 The Gauthier Law Group, LLC. All rights reserved.