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.

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.

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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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What Forms Are Needed to Dissolve an LLC?
 

References

Related articles

Dissolution of Sole Proprietorship

When it comes time to discontinue the operations of a business formed as a sole proprietorship, owners may find obstacles that prevent them from simply walking away from the company. This is due to the fact that, throughout the life of the organization, the assets and liabilities of the business have become intermingled with the assets and liabilities of the individual owner. The result is that complete dissolution of a sole proprietorship may be more of a challenge than with other business entities.

Maryland's LLC Dissolution Law

By properly dissolving your limited liability company, you can ensure that creditors and state agencies are notified and your finances and professional reputation are protected. An LLC is a common business structure that combines the management flexibility of a partnership with the limited liability of a corporation. The operating agreement or articles of organization may provide when and how the LLC may be dissolved and how you should distribute its assets. Maryland law regulates how LLCs are dissolved if not spelled out in the operating agreement.

How to Divide an LLC

Even if you’ve only been in business a short time, dividing your limited liability company can be complicated, since there is no one-size-fits-all solution. An LLC is a hybrid type of business entity that mixes features of a corporation and a partnership, which makes it flexible. LLCs are formed under the authority of state law, and each state’s LLC law has its own provisions to govern breaking up an LLC. States even have different terms to describe this event – winding up, termination, cancellation or dissolution.

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