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.

Ready to start your LLC? Start an LLC Online Now

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.

Ready to start your LLC? Start an LLC Online Now
What Forms Are Needed to Dissolve an LLC?

References

Related articles

How to Stop My LLC

The limited liability company is a popular business form because it offers owners the limited liability of a corporation without the burden of many of the formalities that corporations must adhere to. If you close an LLC, however, you must follow certain procedures mandated by state law.

How to Dissolve an LLC in Nevada

A limited liability company, or LLC, is an independent legal entity that will continue to exist, regardless of the status of its owners, unless officially dissolved. In Nevada, the managers of an LLC can file articles of dissolution with the state by visiting the Secretary of State's website. The website contains all of the information needed to prepare a filing that complies with the dissolution provision of the Nevada Limited Liability Company Act. The LLC is considered officially dissolved once the articles of dissolution are accepted by the state.

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.

LLCs, Corporations, Patents, Attorney Help

Related articles

Maryland's LLC Dissolution Law

By properly dissolving your limited liability company, you can ensure that creditors and state agencies are notified ...

How to Close an LLC

A limited liability company is legally considered a registered citizen of the state where it filed articles of ...

Why Dissolve a Limited Liability Company

A limited liability company’s dissolution is the process of permanently winding up the affairs of the LLC. Once ...

How to Dismantle an LLC

A limited liability company, or LLC, is a business designation that allows its owners, known as members, to maintain ...

Browse by category
Ready to Begin? GET STARTED