Is There Risk in Walking Away from my LLC?

An LLC is a legally formed business entity, and there is risk in leaving it just languishing. An “inactive” LLC is a business entity that has ceased its primary business operations. This usually means it is no longer generating revenue, conducting transactions, or engaging in the commercial activities it used to. Though it might be non-functioning, from a legal and regulatory standpoint, the LLC still exists until it is formally dissolved.

Don't just walk away...shut it down properly.

It is a mistake to assume that ceasing operations just ends an LLC's obligations. Until the formal dissolution process is complete, the entity is active and expected to fulfill all statutory and regulatory requirements.

What Are the Risks of Not Dissolving an Inactive LLC?

1.) Ongoing Fees and Taxes: Most states impose annual or biennial fees, franchise taxes, and reporting requirements on all registered LLCs, regardless of their operational status. An inactive LLC will continue to incur these costs, which can add up to thousands of dollars per entity over several years. (Why continue paying?)

2.) Penalties for Non-Compliance: Failure to file annual reports or pay taxes on time can result in late fees, interest charges, and other penalties like liens on property. Over time, persistent non-compliance can lead to the state administratively dissolving the entity, which can create further complications and may not absolve the company of past-due obligations. (Administrative dissolution is not the same as formal dissolution.)

3.) Legal and Liability Risks: An inactive but undissolved LLC remains a legal entity that is capable of being named in lawsuits. Maintaining the entity unnecessarily expands your liability footprint. An addition risk that is related to this is that if the entity is “administratively” dissolved for non-compliance, the members may lose their limited liability protection and potentially expose their personal assets to business debts or liabilities. (Why hang yourself out to dry?)

4.) Administrative and Regulatory Burden: An inactive LLC adds to the complexity of your business structure. You must continue to track filing deadlines and manage paperwork for entities that provide no business value. This diverts resources and attention from active, revenue-generating parts of your business. (Why file tax returns and regulatory reports for no revenue?)

If your business structure has a large portfolio of entities, these risks are multiplied. An unmanaged collection of inactive LLCs can quickly become a source of significant risk, financial leakage, and compliance headaches.

What is the Process for Formally Dissolving an LLC?

Formally dissolving an LLC is a multi-step process that ensures the entity is properly wound down in the eyes of the law. While the specific requirements vary by state, the general framework is consistent. Properly navigating this process is essential for protecting the business and its members from future liabilities.

Follow the steps.

Step 1: Member Vote and Approval: The first step in a dissolution is to obtain approval from the LLC’s members. The LLC’s operating agreement will indicate how voting and meetings are managed. Usually a “special meeting” is required with formal minutes and resolutions signed by all the members. This step is critical because the documentation showing approval of the members to dissolve the company will be needed later on.

Step 2: Filing Articles of Dissolution: Once the members have approved the dissolution, the next step is to file formal paperwork with the Secretary of State or the Corporations Division as the case may be. The "Articles of Dissolution" is the document that officially notifies the state that the LLC intends to cease to exist. (Note: It is important to also cancel any business licenses or other regulatory approvals which formerly enabled the company to operate.)

Step 3: Notifying Creditors and Settling Debts: After filing for dissolution, the company must notify all known creditors. This notification provides creditors with an opportunity to submit claims against the company. The business must then proceed to settle all its outstanding debts and liabilities. This "winding up" process includes paying off loans, settling accounts with vendors and fulfilling any other financial obligations. Please note that if this is not done, the liability for the debts will pass directly to the members regardless of the limited liability structure of the entity.

Step 4: Distributing Remaining Assets: Once all creditors have been paid, any remaining assets of the LLC can be distributed to its members. The distribution of assets should be done in accordance with the terms laid out in the operating agreement or, if not specified, according to each member's ownership percentage.

Step 5: Final Tax Filings: The final step is to file final tax returns with the appropriate federal, state, and local tax authorities. This includes marking the final return box on the tax forms to indicate that the LLC will not be filing in the future. Failing to complete this step can lead to continued tax notices and potential penalties. (Returns may include sales tax, property tax, federal income tax, etc.)

Get it done, don't just put a pin in it.

In conclusion, maintaining an inactive LLC is a common oversight that can lead to significant financial and legal consequences. The ongoing fees, tax obligations, and compliance risks associated with these entities create an unnecessary drain on your business and personal resources. Just allowing a languishing entity to be administratively dissolved isn’t the answer. Formal dissolution is a necessary procedure for mitigating liability and maintaining a lean, compliant business structure.

Curry Andrews, Attorney