Dissolving an LLC in Texas
Many business owners form limited liability companies due to their flexibility. LLCs can exist forever (perpetual duration) or they can do the business they intended to do and be terminated.
Dissolving an LLC is more of a complicated process than forming one. It’s a multi-step process that requires compliance with both the state’s LLC Act and the LLC’s operating agreement. Additionally, if you don’t properly dissolve an LLC, you’re risking more than just losing the business.
Keep reading for an in-depth overview of how to dissolve an LLC in Texas and what happens afterwards.
What is an LLC?
An LLC, is a limited liability company, one of the most popular business structures today because of the unique benefits they offer. One of the greatest advantages of a limited liability company is how it separates the business owner from the business. An LLC owner is not personally held accountable for company liabilities.
What is Dissolving an LLC?
Dissolution generally occurs when the business purpose of the LLC is completed or ceases to be economically viable. The members may also agree to dissolve the LLC if they are at an impasse regarding fundamental decisions concerning the LLC's business operations.
Dissolution is NOT termination. It’s the first step in the termination process to dissolve an LLC. Dissolution changes the purpose of the LLCs existence - rather than the purpose being to conduct business, it’s now to wind up and liquidate.
Reasons for Dissolving an LLC
Businesses often have a triggering event that begins the dissolution process of an LLC. Oftentimes, that triggering event may have been stated in the Operating Agreement.
For example, if an LLC was formed for a specific purpose, the Operating Agreement would have a clause stating that the LLC must dissolve once that specific purpose was met. The triggering event may also be a member’s vote. Here are a few other reasons for dissolving an LLC:
- Planned expiration (as mentioned above)
- Company going out of business
- Not paying taxes or following state laws
- Death of a member
- New job or venture
Depending on your unique situation there are a number of reasons that may lead to dissolving an LLC.
How to Dissolve an LLC
Just as forming an LLC was a process, dissolving one is as well. There are steps involved to ensure it’s handled properly. Plus, in Texas, there is a $40 filing fee!
Vote to dissolve the LLC – If it’s a voluntary dissolution, all members of the LLC must grant approval for the dissolution of the business. Your Operating Agreement should outline the process and needed approvals. While LLCs are not required to document this decision, it’s recommended to have a business lawyer present and document the decision and member approval.
File articles of dissolution – Articles of dissolution protect yourself from future liability for reports, taxes, and fees. They’re the reverse document of organization articles – they end your business entity’s existence. If you don’t file articles of dissolution when you close your LLC, the state will assume that you’re still doing business and you can become liable for additional fines and penalties.
Cancel Permits and Licenses - Cancelling permits and licenses stops the state, city, and/or county government from charging you annual fees and holding you to reporting requirements.
Cancel EIN – The IRS can’t cancel your EIN. Once you’re assigned an EIN, it’s a permanent Federal taxpayer identification number for that business. The EIN is never reused or reassigned to another business entity but can be reused by your business should you open the LLC again.
Pay Debts – Any credit claims must be paid or settled with creditors. It’s advised to have a business lawyer assist with this in case of negotiations or rejections.
Distribute Assets – Once you pay claims and debts, the remaining assets need to be distributed to members. Distributions must be reported to the IRS. Again, it’s best to seek guidance from a business lawyer for details on distribution.
To dissolve your LLC in Texas, you must also submit the completed Certificate of Termination of a Domestic Entity (Form 651) with a certificate of account status to the Secretary of State by mail, fax, in person or at SOSDirect Online.
With all of these steps to follow – and possible more – a common question is how long does it take to dissolve an LLC?
The length of time it takes to process an application to dissolve an LLC varies from state to state. In Texas, certificates of termination processing time takes approximately 3 to 5 days and it takes 4 to 6 weeks for a form 05-359, Request for Certificate of Account Status.
What Happens after you dissolve your LLC
If you voluntarily dissolved your LLC, you could reopen it as long as you left properly and in good standing. Your EIN will always be assigned to that business. However, your business name can be taken immediately after you dissolve your corporation.
If you dissolved the company properly, and the LLC is sued after it’s no longer in business, it’s rare that the lawsuit is successful. However, if you don’t properly dissolve the business, then the court may rule in the favor of the person or business suing you.
In Texas, there are also penalties if you don’t dissolve an LLC properly, which is one of the many reasons it’s best to consult with a business lawyer if you must dissolve your LLC. A lawyer can help protect you through the process of properly dissolving your LLC and afterwards.