Can a Creditor Collect if an LLC Is Dissolved?

By Elizabeth Rayne

Circumstances might arise under which a creditor can collect debt from a dissolved limited liability company. As such, it is essential for business owners to follow the steps necessary to properly dissolve the company and be aware of situations where creditors may collect distributions that have already been allocated to LLC members.

Proper Dissolution

To ensure creditors can no longer pursue claims against your LLC, you must properly dissolve the company. LLC formation and dissolution is determined by state law where the company is located. Generally, you must file a certificate of dissolution with the secretary of state and file final tax returns with the state and IRS. You should also cancel all licenses, permits and other professional registrations to protect your finances and reputation. When winding down the company, set money aside to pay remaining debts and taxes before making distributions to individual members.

Notice of Dissolution

When dissolving an LLC, most states require members to provide notice of the company's closure to all known creditors and potential claimants. Additionally, the LLC may be required to publish notice in a local newspaper with information about the company's closure, deadline for pursuing claims and an address where final claims for uncollected debts may be sent. In many states, claims against a properly dissolved LLC that has provided the correct notice will be barred after a specified time period, meaning the creditor has no option to collect against the LLC.

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Statute of Limitations

A recent Washington Supreme Court decision held that creditors and claimants may bring lawsuits against a dissolved LLC three years after the company closed, as a result of the state's statute of limitations legislation. Even when the LLC was properly dissolved, and notice was provided, the court found that there is no limitation on initiating a lawsuit against a dissolved LLC, so long as the claimant is within the statute of limitations. Although the decision is limited to the state of Washington, LLC creditors in other states will likely use the same argument to pursue dissolved LLCs.

Personal Liability

In most cases, the members of an LLC are not personally liable for the debts of a company. However, if all of the assets of the LLC were distributed and the LLC did not properly dissolve or provide notice of dissolution, a creditor might be able to collect the distributed assets from the individual members. Nonetheless, it is unlikely that a member of an LLC will be held liable for the debt of a company beyond the profits he received.

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References

Related articles

Legal Ramifications of Dissolving an LLC

A Limited Liability Company (LLC) is an organization that combines features of a partnership and a corporation. Like a partnership, the owners of the LLC pay tax on the business’s income. Also like a partnership, an LLC has few formal management restrictions. Like a corporation, an LLC protects its owners from being personally liable for the business’s liabilities. LLCs are governed by state law, so if an LLC dissolves the process is defined by the state where it was organized. While there are general trends that are consistent, regardless of where the LLC is located, the specific steps for dissolving an LLC will vary by state. Before dissolving an LLC, check the laws of the state where it is located.

How to Dismantle an LLC

A limited liability company, or LLC, is a business designation that allows its owners, known as members, to maintain limited personal liability for the actions of the company. Dismantling an LLC involves a number of steps that are similar to the process of closing any business entity. Members should review the LLC’s original operating agreement, which typically details the process for dismantling the LLC. If there is no agreement or no such provision exists, it falls to a majority vote of the members to approve the dissolution and to create a timeline for formal closure and dismantling.

How to Liquidate an LLC

According to the U.S. Department of Labor, about 17 percent of small businesses fail within the first five years of operation. When an LLC closes, its assets are liquidated and used to pay LLC creditors, and any remaining funds are distributed to LLC members according to their ownership stake. This process of liquidating an LLC is called “winding up,” and must be completed before the LLC can be terminated.

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