What Happens to Debt When You Dissolve an LLC?

by Anna Assad

    The formal dissolution of a limited liability company is the end of business operations. Dissolution can be voluntary, like by a passing member vote, or involuntary, by judicial order. The LLC must address its outstanding debt at the time of the filing of dissolution papers with the state department, or as soon as possible after a court order is issued.

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    Function

    Dissolution is the formal end of the business entity, whether voluntary or involuntary. All outstanding debts become due in full and the members are obligated by law to end the financial affairs of the company. The LLC gives up or loses its authority to conduct business legally once dissolved, but the company's debts do not end with the close of the business.

    Effects

    Voluntary dissolution allows the LLC to pay debts using a plan or arrangement devised by the remaining members. The members either pay off debts in full or contact creditors to make a repayment schedule. Involuntary dissolution can lead to the court appointing a trustee to sell or dispose of the LLC's assets; the trustee uses the proceeds to settle the company's debts.

    Considerations

    Some states do not allow an LLC to file state dissolution papers until outstanding debts have been paid or satisfactory payment arrangements have be made. Business taxes owed to the state may have to be made in full prior to dissolution unless the LLC receives permission to dissolve from the state revenue authority. The LLC may have to list one or more members on the dissolution papers who are assuming the LLC's liability to creditors once the company ceases to exist.

    Misconceptions

    A creditor with a money judgment against the LLC may be able to use the enforcement methods available to seize LLC assets towards payment of the judgment. Although LLC members have personal asset protection against the company's debt while the LLC is in business, dissolution can leave one or more members open to personal lawsuits brought by LLC creditors, depending on state laws.

    About the Author

    Anna Assad began writing professionally in 1999 and has published several legal articles for various websites. She has an extensive real estate and criminal legal background. She also tutored in English for nearly eight years, attended Buffalo State College for paralegal studies and accounting, and minored in English literature, receiving a Bachelor of Arts.