How to Dissolve an LLC in Delaware? (2024 Updated Guide)

Published by Delina Chantel Yasmeh | Author

Last updated: November 18, 2024

FACT CHECKED by Lou Viveros, Growth & Transition Advisor

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Most entrepreneurs embark on new ventures with optimism and a vision for success. However, the reality of entrepreneurship acknowledges the risks involved in the business world.

According to the U.S. Bureau of Labor Statistics, 20% of new businesses fail within their first two years, and only 50% survive to see their fifth year. This stark reality underscores the importance of not only planning for growth but also being prepared for the possibility of dissolution.

Together with my team of legal experts and attorneys, I have helped many business owners to do this smoothly and without additional charges.

To help you do the same, we have created this guide with a special focus on why business owners might choose to dissolve a Delaware limited liability company and what happens in both voluntary and involuntary dissolution cases.

Quick Summary

• To dissolve an LLC in Delaware, all members must accept a resolution to dissolve the business, deal with tax obligations, and file a Certificate of Cancellation with the Delaware Secretary of State.
• It costs $200 to file the Certificate of Cancellation to dissolve a legal entity in Delaware by mail.
• According to the U.S. Bureau of Labor Statistics, 20% of new businesses fail within their first two years, and only 50% survive to see their fifth year.
• Once an LLC is officially dissolved, its legal existence will shut down in the state of Delaware.

Definition and Importance of Dissolving a Delaware LLC

Dissolving a Delaware LLC is a formal process that involves terminating the limited liability company’s existence and winding up its business operations.

This process is essential for Delaware LLCs that are no longer in operation or have fulfilled their purpose. Properly dissolving a Delaware LLC is crucial for several reasons:

• Avoid Further Business Activities and Liabilities: Once an LLC is dissolved, it ceases all business operations, preventing any further liabilities or obligations from arising.
• Prevent Accumulation of Unnecessary Taxes and Fees: Dissolving the LLC ensures that it no longer incurs state taxes, franchise taxes, or other fees associated with maintaining an active business entity.
• Formally Close the Business: It allows LLC members to officially close the business, distribute any remaining assets, and move on to other ventures without lingering legal or financial issues.
• Maintain a Good Business Reputation: Proper dissolution helps maintain a good business reputation by ensuring that the LLC is closed in compliance with Delaware law, avoiding potential legal complications or penalties.

By understanding the importance of dissolving a Delaware LLC, business owners can ensure they take the necessary steps to properly wind up their business operations and avoid future complications.

Pre-Dissolution Requirements

Before dissolving a Delaware LLC, several pre-dissolution requirements must be met to ensure a smooth and legally compliant process.

These requirements include:

• Reviewing the LLC Operating Agreement: The first step is to review the LLC Operating Agreement to determine the specific procedure for dissolution. This document often outlines the necessary steps, including the required vote of the LLC members and the process for distributing assets.
• Obtaining Necessary Approvals: Obtaining the necessary approvals from the LLC members is essential. This typically involves a formal vote to dissolve the LLC, as specified in the Operating Agreement, or by default Delaware law if not specified.
• Settling Outstanding Debts and Liabilities: All outstanding debts and liabilities must be settled before the LLC can be dissolved. This includes paying off creditors and ensuring that all financial obligations are met.
• Distributing Remaining Assets: Any remaining assets must be distributed to the LLC members according to the terms outlined in the Operating Agreement or, if not specified, according to Delaware law.

By meeting these pre-dissolution requirements, Delaware LLCs can ensure that the dissolution process is conducted smoothly and in compliance with legal standards.

Reviewing LLC Documents

Reviewing the LLC Operating Agreement is a crucial step in the dissolution process.

The Operating Agreement may specify the procedure for dissolution, including the required vote of the LLC members and the distribution of assets.

Delaware law provides default rules for LLCs if the Operating Agreement does not specify the procedure.

In addition to the Operating Agreement, the LLC’s articles of organization and other formation documents should also be reviewed to ensure that all necessary steps are taken to properly dissolve the LLC.

These documents provide a legal framework for the dissolution process and help ensure that all actions taken comply with Delaware law.

By following these pre-dissolution requirements and reviewing the necessary LLC documents, Delaware LLCs can ensure a smooth and proper dissolution process.

This careful review helps avoid potential legal issues and ensures that all members agree with the steps taken to wind up the business.

6 Steps to Dissolving an LLC in Delaware

The Secretary of State allows LLCs to dissolve after members have completed the following required procedures [1].

This guide will help you understand the process of dissolving a Delaware company.

Step 1: LLC Members Vote to Dissolve the LLC

Delaware LLC dissolution starts by looking into specific provisions in your LLC agreement.

There are several reasons why an LLC might choose to dissolve, and the process for doing so will vary depending on those circumstances.

In our case, our LLC was dissolving voluntarily hence we needed to follow the provisions in the operating agreement about how to wind up the company's affairs.

This might include selling off company assets, paying creditors, and distributing any remaining assets or LLC property among LLC members.

If you can't find specific instructions in your LLC agreement, you'll need to contact a Delaware lawyer for help.

The process will usually require that the LLC members vote to dissolve the company and then work with the state to terminate its existence properly and the right to conduct business.

Step 2: Notify Creditors About Your LLC's Dissolution

When dissolving a Delaware LLC, it's important to inform creditors, banks, clients, suppliers, and government agencies connected to the LLC's liabilities or potential future liabilities.

Many business owners need to notify creditors during this process to ensure all obligations are addressed.

This can be done by sending advance notices as required by the LLC agreement or fulfilling your duties as an LLC liquidation manager or member.

Some notices may be a courtesy, while others may need to be formal to notify parties affected by the company's dissolution.

Step 3: File Final Tax Returns and Obtain Tax Clearance

The next step is to file final business taxes including the Delaware Franchise Tax.

This tax must be paid to dissolve a Delaware limited liability company. This is a flat fee that is not based on the company's income or business conducted. If the LLC has generated no income, it must pay a franchise tax.

The easiest way to pay the Delaware franchise tax is online through the state's e-gov portal in their franchise tax section. You can also mail a check or money order payable to "The Delaware Secretary of State, Delaware Division of Corporations" [2].

If you have trouble calculating your franchise tax and filing fees, we recommend seeking legal or tax advice from a professional.

For our Delaware LLC, we also informed the IRS and State Division of Revenue of the dissolution with a final return, stating the LLC's full name, employer identification number, address, effective dissolution date, and reasons.

This step involves filing final tax returns and obtaining tax clearance, which is crucial for complying with Delaware business tax requirements.

Single-member LLCs report on Schedule C Form 1040, while multi-member LLCs file their tax return as the final return for tax purposes.

"Dissolving an LLC requires adhering to legal procedures, communicating with stakeholders, and properly managing assets. Legal consultation is key to navigate these complexities and avoid potential risks."
- Jon Morgan, CEO, Co-Founder and Editor-in-Chief of Venture Smarter

Step 4: File Articles or Certificate of Dissolution

The next step in the dissolution process is filing the Certificate of Cancellation with the Delaware Corporation Division.

This document certifies that the Delaware LLC has been dissolved and confirms all of the steps that were taken to complete the process. Cancellation filing can be done online or by mail.

The LLC Certificate of Cancellation must contain the following information:

• The LLC's name and state of formation
• A statement that the LLC has been dissolved
• The signatures of all of the LLC's members or managers (or the registered agent)

The Certificate of Cancellation can be downloaded from the Delaware Corporation Division website. There is a $200 filing fee for both online filing and mail submissions [3].

In our case, we submitted this document online and paid for a 24-hour expedited service processing.

Once the Certificate of Cancellation is filed with the State, the dissolution process is complete. The LLC will no longer exist, and all of its assets and liabilities will be transferred to its members (or other entities).

Step 5: Distribute Assets

Once all acknowledged claims are settled and necessary deadlines have passed, any remaining assets can be allocated to the LLC shareholders.

The distribution of our LLC's assets was done following the operating agreement terms.

Generally, per state laws asset distribution to shareholders is based on their shareholdings; for instance, a shareholder with 15% of the LLC assets would receive 15% of the remaining assets.

Step 6: Close All Accounts and Cancel Licenses and Permits

In the last step, you must ensure that all corporate bank accounts, credit lines, and financial services are closed. This step is crucial to prevent any future financial liabilities or unauthorized transactions.

During our dissolution, we terminated all service accounts that were in the corporation's name. Ensure all final bills are paid and services are formally discontinued.

Actively cancel any business licenses, permits, or registrations that the corporation held. This might include state or local business licenses, professional licenses, or any other permits specific to the corporation’s operations.

FAQs

References:

1. https://corp.delaware.gov/disso09/
2. https://corp.delaware.gov/
3. https://corpfiles.delaware.gov/webllc-can09.pdf