How to Cancel a Delaware LLC Officially and Legally
Cancellation is the term Delaware uses to describe the dissolution of a Delaware LLC. While the official term for shutting a corporation is “dissolution,” the two terms are often used interchangeably by business owners. Most new business owners want to know how to form a Delaware LLC, but a few also ask how to cancel a Delaware LLC in case the LLC goes out of business. They often don’t know how to cancel their Delaware LLC.
The Delaware LLC Act allows a Delaware LLC in good standing to have a perpetual existence, unless otherwise specified in the LLC Certificate of Formation or Operating Agreement, unless the LLC becomes cancelled for failing to pay franchise tax, failing to maintain a registered agent, or filing a Certificate of Cancellation.
When to Cancel an LLC
When a Delaware LLC has stopped operating, the Delaware LLC Act permits the LLC to file a Certificate of Cancellation to end the LLC’s existence. This should not be filed until the LLC has paid creditors, ceased operations of the LLC’s affairs and provided reserve funds from the LLC in trust for foreseeable future creditors for the next 10 years before distributing funds to its members.
Absent the filing of a Certificate of Cancellation, the LLC will continue to accrue Delaware franchise tax year after year. Failing to pay the franchise tax will result in administrative dissolution when the franchise tax goes into arrears. The tax, late fees and interest must be paid should the members later decide to renew and revive the LLC to bring the LLC back to good standing. The public cancellation filing stops the LLC from accruing future franchise tax, penalties and interest. Should a Certificate of Cancellation be filed in error, a Certificate of Correction can be filed to undo the cancellation retroactively and restore good standing status.
The following are “wind down” steps to take to cancel a Delaware LLC:
Steps to Cancel a Delaware LLC
1. Consult the LLC Operating Agreement
LLC Operating Agreements often contain requirements for canceling the LLC. Those requirements typically detail what is necessary to call a member vote to dissolve the Delaware LLC, and what percentage of membership interests must vote for the cancellation to be valid.
2. Take a Member Vote
If the LLC Operating Agreement does not specify guidelines for canceling the LLC, the Delaware LLC Act states that the LLC may be cancelled after affirmative or written consent of members who own more than two-thirds of the current percentage ownership.
3. Appoint a Manager to Wind up the LLC’s Affairs
The state of Delaware requires that the company pay existing debts, settle lawsuits, and “make reasonable provision” for the LLC’s liabilities before the company can be cancelled. A liquidation manager can be appointed by the LLC to handle these duties. The liquidation manager of the LLC often oversees the distribution of the remaining assets of the LLC.
4. Payoff Creditors, Current and Forseeable, before paying Members
The liquidation manager should respect the order of priority when paying debts and distributing residual funds to managers. The LLC liquidation manager should first payoff current creditors and set aside sufficient funds to payoff all foreseeable creditors over the next 10 years before payments are made to members for their equity interest. Paying members distributions when creditors exist and the company is insolvent is a voidable or fraudulent transfer, which results in both transferer and transferee liability.
5. Pay The Delaware Franchise Tax
Prior to filing the Certificate of Cancellation, the Delaware franchise tax open balance must be paid plus the current calendar year franchise tax, even if the cancellation is filed on January 1, or the Delaware Division of Corporations will not accept the cancellation filing.
The franchise tax is an annual fee not influenced by the LLC’s income or business conducted. If the LLC generated no income during the past year or ever, the company nevertheless is still required to pay the annual franchise tax, plus any back taxes, penalties and interest due to the Delaware Secretary of State. The LLC cannot be cancelled until all Delaware franchise tax is paid.
Delaware franchise tax is also not pro-rated. As a result, the LLC will need to pay the full Delaware franchise tax for the year if the LLC is not cancelled before January 1.
IncNow can help an LLC determine the franchise tax fee owed, plus we can assist with paying outstanding fees to the State of Delaware. Please call us at 800-759-2248 for help.
6. Pay the LLC’s members
Funds available after providing for current and foreseeable creditors should then be distributed to the members of the LLC according to the allocations and pro-rata distributions provided for in the Operating Agreement.
7. File a Certificate of Cancellation
The Certificate of Cancellation is a document that is filed with the state of Delaware in order to officially cancel the LLC. The Certificate of Cancellation should only be filed after your LLC has “wound down” its affairs completely.
IncNow can help file the Certificate of Cancellation. The processing fee is $189 (plus a $200 state fee and outstanding franchise taxes). Please call 800-759-2248 for details or use our fast and easy Cancellation/Dissolution online order form.
Please note: Once the Certificate of Cancellation has been filed, it can no longer conduct business through the LLC.
Should the LLC file its Certificate of Cancellation in error, we can help controlling members file a Certificate of Correction to undo that filing and restore the Delaware LLC to good standing which ratifies actions during the cancelled period as though the company was always in good standing.
8. Close Your Business Account with the IRS
For a multi-member LLC, the IRS can close the LLC’s federal tax record (after taxes have been filed and the LLC has indicated to the IRS that the return is a final return). The LLC should also send a final return to State Division of Revenue authorities anywhere income taxes are due. The IRS should be sent a letter that includes the full legal name of the LLC, the EIN, the LLC address, and the reason for closing the account (i.e. cancelling the LLC). If the LLC retained a copy of the original notice issued from the IRS when the LLC’s EIN was assigned, include that too.
Most LLCs are single-member LLCs which do not have tax returns, but instead report on the single member’s Schedule C for self-employment income on the individual’s Form 1040 personal return. Most others file 1065 partnership tax returns which will need to be filed as a final return in addition to state income tax returns where the company did business.
For most states east of the Mississippi, depending on where is the LLC is located, the letter should be sent to:
Internal Revenue Service
Cincinnati, Ohio 45999
IncNow Can Help
We can prepare and file a Certificate of Cancellation for you! Please call 800-759-2248 for details or use our fast and easy Cancellation/Dissolution online order form.