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.

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.

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.

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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.

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How to Close an LLC

References

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The Law & LLCs

A limited liability company is a creation of state law. The requirements you must meet to form, dissolve and manage an LLC may vary from state to state. However, the law of the state in which you create the LLC is the law that you must adhere to. Most jurisdictions in the country employ LLC regulations that are quite similar to one another.

Arkansas LLC Information

A limited liability company (LLC) is a business type with the legal aspects of both a corporation and a partnership. The personal assets of LLC members are protected from the company's creditors and debts, but the company must file Articles of Organization with the Secretary of State to gain legal recognition and legally conduct business. In Arkansas, the laws governing an LLC are found in Chapter 32 of Title 4 of the Arkansas Code.

Can I Use a Bank Account After Dissolving an LLC?

Using your limited liability company's bank account after dissolution is essential to wind up the affairs of the LLC, but you cannot use it to enter into new business. An LLC is an independent business entity formed under state law, which also controls how an LLC comes into existence and how it goes out of business. By following the correct steps for dissolution, you will ensure that you have satisfied all the debts and obligations of the company.

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