Most entrepreneurs are optimistic when starting a new business venture. However, many understand that commerce is inherently risky. According to the U.S. Bureau of Labor Statistics, 20% of new businesses fail within two years, and only 50% make it to their fifth year.
It’s ok if you decide to close your business. However, you need to make sure that you properly wind up and cancel your Delaware LLC to avoid potential penalties or costly disputes. Unlike LLCs formed in other states, canceling a Delaware LLC is a simple process. Here’s how to close a Delaware LLC.
How to Close a Delaware LLC: 3 Steps
Formally closing a Delaware LLC requires completing the following steps:
Step 1.) Members Vote on Cancellation
Before proceeding with closing the business, the existing Members must agree to cancel the LLC. Oftentimes the LLC Operating Agreement will include a provision detailing how Members should come to a decision on whether to cancel the LLC.
Step 2.) Complete a Wind Up of the LLC
The next step in canceling an LLC is to “wind up” the business assets. Winding up an LLC involves using available funds to pay all outstanding business creditors before distributing any remaining assets to Members before officially closing the business.
To wind up an LLC, the business must distribute its remaining assets to creditors first and Members second, while also setting aside funds for 10 years of potential creditor claims.
Before officially closing an LLC, Members or Managers should take steps to formally end business operations. This may involve:
- Terminating all contracts;
- Withdrawing any foreign qualifications;
- Canceling any licenses or permits;
- Notifying customers and suppliers; and,
- Closing business credit lines and bank accounts.
The purpose of winding up an LLC is to dissolve the business properly, fulfilling all legal and financial obligations before officially closing the company.
Step 3.) File a Certificate of Cancellation
Formally closing a Delaware LLC requires filing a Certificate of Cancellation with the Delaware Division of Corporations. After the Certificate of Cancellation is filed, the LLC will be removed from the state’s database and will lose its perpetual existence, meaning that it will no longer be allowed to conduct business. Additionally, the LLC will no longer be responsible for paying Delaware Annual Franchise Tax fees.
How to Wind Up an LLC
An LLC’s Members need to wind up the company’s affairs before filing the Certificate of Cancellation. Winding up the LLC involves addressing the company’s liabilities and distributing its remaining assets.
An LLC must discharge any known claims or liabilities against the company, including prospective foreseeable claims, before the LLC can be formally canceled.
Some examples of potential claims include:
- Employee wage claims;
- Vendor or supplier invoices;
- Unpaid rent or mortgages;
- Outstanding loan or credit card balances;
- Unpaid taxes; and,
- Legal settlements or judgments.
Why is Winding Up an LLC Important?
The LLC Members must either pay all the company’s obligations or make reasonable plans to pay. It is important to prioritize and pay off any known liabilities before canceling the LLC. This helps better protect the personal assets of the Members or Managers. If the LLC fails to pay off its debts, creditors could have legal grounds to go after the personal assets of Members or Managers.
How to Distribute an LLC’s Assets: 4 Steps
After discharging the company’s liabilities, the Members can move forward with distributing any remaining business assets. An LLC’s assets should be distributed in the following order:
Step 1. Satisfy Creditors
Creditors are always first to receive distributions when an LLC is being closed. Business creditors may include Members and Managers depending on some provisions of the law.
Step 2. Satisfy Distributions to Members.
After satisfying business creditors, an LLC can proceed with making distributions to current and former Members. Members may set out these distributions in the LLC Operating Agreement.
Step 3. Return Contributions to Members
After satisfying any agreed upon distributions, each Member should have their initial capital contribution returned by the LLC.
Step 4. Make Final Distributions
Finally, the LLC should use any remaining business assets to make distributions to existing Members proportional to their ownership share in the company.
These are general guidelines for distributing an LLC’s assets during a wind up. However, LLC Members can arrange their own priority of payments in the Operating Agreement.
What Happens When an LLC Is Void?
LLCs must meet certain requirements in order to remain compliant with their state of formation. If an LLC is not compliant for a prolonged period of time, the state may administratively cancel the LLC. This is known as the company becoming “void”.
The Delaware Division of Corporations will void a Delaware LLC for two reasons:
- Failure to Pay Delaware Annual Franchise Tax
The state will void a Delaware LLC if the company fails to pay its Delaware Annual Franchise Tax balance for three consecutive years.
The Delaware Annual Franchise Tax is a flat fee of $300 due each year after an LLC is formed. A Delaware LLC will owe franchise tax in any calendar year which it exists, regardless of whether the company had any income in a given year. Delaware also charges a $200 late fee and interest to LLCs that fail to pay the franchise tax on time.
2. No Registered Agent for 30 Days
The Delaware Division of Corporations will void a Delaware LLC if the company does not have a registered agent assigned in the state’s public database for more than 30 days.
Delaware requires LLCs to have a Delaware registered agent assigned to represent the company at all times while the LLC is in existence.
Can You Revive a Void Delaware LLC?
A Delaware LLC that has become void, due to either failing to pay its franchise tax balance or not assigning a registered agent, can be revived. In some cases, a revival can be more simple and less costly than forming a new LLC.
To revive a void Delaware LLC, you can file a Delaware Certificate of Revival. Filing the Certificate of Revival will restore the LLC’s existence and maintain the company’s business history. A Delaware registered agent can assist you with filing a Certificate of Revival with the Delaware Division of Corporations.
Note that before a Certificate of Revival can be filed, an LLC must pay the Annual Franchise Tax that it owes. This includes the annual fees of $300 that are owed, as well as any late fees that have accumulated. In some instances, starting a new Delaware LLC might be a better option for the business instead of reviving the old one.