Can You Pause a Delaware LLC? 2 Options to Consider
There are choices to mull over if you want to temporarily stop operations but not close your business.
Not every business is a rocket ship. Some launch slowly and some are delayed by months or years. Nevertheless, all Delaware LLCs must pay an annual fee to keep the company in good standing. This is referred to as a franchise tax. It applies whether the LLC owns any assets or is conducting any business. This leads some LLC owners to ask if they can temporarily pause their Delaware LLC, much like pausing a gym membership.
Business owners often seek a way to temporarily suspend their LLC without permanently closing it. Common motivations include taking a break from business operations, changing careers, returning to school, operating a seasonal business, or waiting for improved financial or market conditions. Some owners wish to preserve their business name and retain the flexibility to restart operations in the future, thereby avoiding the need to form a new LLC. However, it is important to note that most states, including Delaware, do not provide an official pause status for LLCs.
Why Do Business Owners Want to Pause an LLC?
When business owners inquire about pausing an LLC, they typically refer to temporarily ceasing operations without permanently dissolving the entity to save on government and registered agent maintenance fees. The goal is often to avoid ongoing fees, annual reports, and compliance requirements while preserving the LLC, its business name, and the ability to restart operations at a later date.
Can You ‘Pause’ a Delaware LLC?
Although the idea may resemble pausing a subscription, an LLC in Delaware cannot be temporarily suspended in the same manner. Delaware does not provide an official “freeze” or “pause” status that suspends an LLC’s legal obligations. Even if the business generates no revenue or ceases operations, the LLC remains active under Delaware law until it is formally canceled or administratively dissolved for failing to pay franchise tax or maintaining a registered agent.
While active, the LLC is responsible for Delaware’s $400 annual franchise tax, due on June 1 each year, as well as other compliance requirements. To maintain good standing, these obligations must be fulfilled regardless of whether the business is actively operating. Therefore, business owners must choose between keeping the LLC active and compliant, dissolving it, or allowing it to become inactive through noncompliance, which may result in legal and financial consequences.
Options for ‘Pausing’ an LLC
Here are two options to consider when you have a Delaware LLC but are not actively operating:
Option 1: Keeping the LLC Open While Inactive
Maintaining an inactive LLC by keeping it in good standing means the entity pauses business operations but continues to exist legally. This status does not exempt the LLC from ongoing maintenance or compliance responsibilities. The LLC must still pay Delaware’s annual franchise tax, maintain a registered agent, and fulfill any applicable federal or state tax filing requirements.
Choosing to do this can make it easier for owners to resume business and keep the same entity name if they plan to proceed with the same LLC in the future. This allows the LLC to retain its history, age, and business relationships, making it convenient to resume operations later. However, it’s important to keep in mind that the annual costs will continue, and failure to pay can result in penalties and interest.
Option 2: Dissolve or Cancel the LLC
Dissolving the LLC formally terminates its legal existence and ends future Delaware franchise tax obligations once cancellation is complete. If continued operation is not planned, dissolution can protect business owners from new lawsuits or debts associated with the LLC. It is essential to address business assets, contracts, and tax considerations prior to cancellation. If the LLC is canceled and later needs to be reestablished, a new entity must be formed or a correction can be filed to undo the cancellation
What Happens If You Stop Maintaining the LLC?
If an LLC ceases paying franchise taxes when due without formal cancellation, Delaware will soon administratively dissolve the LLC. This will result in late fees, penalties, and ultimately the LLC being declared void by the State of Delaware. Your company name will then be available for filing by anyone else in Delaware.
You can later reinstate the LLC and rectify all things that happened in the interim to reinstate the liability shield. However, your company name may no longer be available. Reinstating Delaware LLC requires payments of three years of back taxes, LLC fees, penalties and interest, plus a reinstatement fee and registered agent fees. Some business owners decide to never pay franchise taxes and just wait for a problem or necessity later and then reinstate. This is a risky strategy.
Which Option Makes More Financial Sense?
For Delaware LLCs, business owners generally have two practical options. Although these options may seem limited, the most appropriate choice depends on the long-term plans for the business.
Restarting the LLC
If business operations are expected to resume in the near future, maintaining the LLC’s active status is often the more practical option. Although Delaware’s $400 annual franchise tax and registered agent fees will continue, this approach avoids the time and expense associated with forming a new LLC. Keeping the LLC active also preserves the business name, EIN, bank accounts, business history, and the existing legal entity.
If Long-Term Business Operations Are Not Anticipated
If a long-term break from business operations is anticipated, generally exceeding two years, it may be more cost-effective to dissolve the LLC by filing a Certificate of Cancellation with Delaware. Once cancellation is effective and all outstanding obligations are satisfied, future Delaware annual franchise tax obligations cease, and ongoing state fees associated with maintaining the LLC are eliminated. This is a recommended option if the LLC has creditors and a history of revenue or when the LLC owners plan to distribute money out before cancellation. Under Delaware law, the LLC must provide reserve funds for 10 years of foreseeable creditors when canceling the LLC. If the LLC never did business, paying the registered agent fee to resign may be more cost effective.
Taking no action is generally the least desirable option. Even if the LLC has no business activity, Delaware’s annual franchise tax will continue to accrue, along with late penalties and interest if unpaid. After two years of nonpayment, Delaware may declare the LLC “void” for failure to pay franchise taxes. Although reinstatement is possible, it typically requires payment of all past-due franchise taxes, a $200 state reinstatement filing fee, and any applicable penalties and interest. In most cases, this is the most expensive option and may expose business owners to unnecessary financial risks.
In conclusion, although Delaware does not provide a method to pause an LLC, business owners still have viable options. If reopening the business is anticipated soon, maintaining the LLC’s active status may be most appropriate. If operations have ceased for the foreseeable future, dissolving the LLC can prevent ongoing franchise taxes and compliance costs. The most suitable option depends on future business plans and the importance of retaining the LLC’s existence.