No one wants to think about their business closing, but sometimes it is a part of the life cycle of a business.
If you find yourself in a position where you need to wind down your LLC, there are two ways to get it done. The right way and the wrong* way.
Let’s talk about the wrong* way first. The wrong way is to let the state administratively dissolve your LLC after three years of missed annual reports and filing fees. Easy-peasy and free!
Why is it the wrong* way? Because it opens the LLC members up to loads of personal liability (the very thing the LLC was created to prevent). It would be a real shame to make it to the end of the life of your business and toss away the protection. Because winding down the right way minimizes the risk of the business’s liability creeping over to the members.
Ok, you are wondering, why the asterisk?
If there are other issues going on, like personal or business bankruptcy, the right or wrong way may not matter – and winding down may not even be appropriate. If your situation is really complex, a discussion with legal counsel is advised.
If, however, you are just winding down for a less complex reason, here’s the right way:
1. Look to your operating agreement (and absent an agreement, look to the MA LLC Statute). It will have details on what must happen to wind down and dissolve the LLC.
2. Involve all the members and stakeholders in the decision to wind down and dissolve.
3. Let vendors, clients, and staff know.
4. Settle financial obligations as well as you can. Members should NEVER get cash or assets in exchange for ownership interest before any outstanding debt is paid.
5. File a final tax return.
6. File the appropriate paperwork with the Commonwealth.
What happens if you don’t wind down the right way?
There are a host of issues that can crop up. Members can end up taking on business obligations and liabilities personally. The LLC and the Members can open themselves up to tax penalties, even audits. Unknown lawsuits, judgments, or fines can rear their ugly heads and name the Members as responsible parties. And a failure to properly close this chapter of your entrepreneurial career can end up tarnishing your reputation and creditworthiness for any future endeavors.