How to Close an LLC after Bankruptcy

It’s never a happy day when a business has to declare bankruptcy — but it’s not terribly uncommon. And for some entrepreneurs, declaring LLC bankruptcy can actually be a constructive way to get relief from debts and start fresh.

But exactly what are the bankruptcy options for a limited liability company? And how does someone wrap things up after declaring bankruptcy? This guide walks through the basics of dissolving an LLC after bankruptcy so business owners can smoothly move on to whatever’s next.

Bankruptcy Options for LLCs

The two most common bankruptcy options for LLCs include Chapter 7 bankruptcy and Chapter 11 bankruptcy. Of the two, Chapter 7 is a bit simpler — and more final. Under Chapter 7, the court appoints a bankruptcy trustee to handle the case. The trustee then handles the liquidation of the LLC’s assets, using the money from the sales to pay back some or all of the business debts. After the assets are liquidated, the business ceases to exist.

A Chapter 11 bankruptcy petition works a bit differently, as the LLC owner stays in possession of their business, and the business stays open. Instead of liquidating everything, a plan to reorganize the business is created. Creditors get to vote on the plan. If it’s approved, the LLC can get some relief from its debts but still stay open. Likely, the LLC owner repays their debts over a different period of time than the original plan.

If a business owner pursues Chapter 11 bankruptcy, they won’t have to dissolve their LLC. But if they use Chapter 7 bankruptcy, they’ll have to dissolve the business. A small business bankruptcy sometimes has a few different bankruptcy options under Chapter 11. Business owners who are unsure how this process will work would be wise to consult a bankruptcy attorney for guidance.

Note: Keep in mind that the Chapter 13 bankruptcy code is reserved for personal bankruptcy. While sole proprietorships and partnerships might pursue it, Chapter 13 is not an option for LLCs (see the bankruptcy options for LLCs definition guide for more information).

Reasons to Dissolve an LLC after Bankruptcy

Even though bankruptcy effectively stops a business, it doesn’t actually stop the LLC from existing as a legal entity. Unless the business owner formally dissolves the LLC with the state, they’ll still have an LLC on the record. Dissolution is the process that officially shuts down an LLC and takes it off the state record. Find out more with the dissolution definition guide.

As long as the LLC still exists, it can incur ongoing tax liabilities (including the expectation of filing income tax returns and state franchise taxes; see franchise taxes definition for more info), annual report fees, and more (see annual report definition to learn more). The LLC owners will have to dissolve the LLC to avoid those fees. Filing for dissolution also notifies any remaining creditors that the business has closed and can’t pay any more debts.

How to Dissolve an LLC

Every state has slightly different procedures for dissolving an LLC, but the general process is the same. Business owners can find a full walkthrough of the process in this dissolution guide, but here’s a general look at the process:

1. Consult the company operating agreement for how the process must flow.
2. Have the members vote to approve the dissolution.
3. Notify any remaining creditors that the LLC is dissolving (if the bankruptcy process is complete, the LLC will likely only need to address unknown creditors).
4. Get tax clearance and pay any outstanding taxes.
5. File dissolution documents (usually called the Articles of Dissolution, but form names vary by state).
6. Cancel any foreign registrations.
7. Cancel any business licenses.
8. Liquidate any remaining assets to pay any additional debts and distribute what’s left to the members.

If the LLC is dissolving due to business bankruptcy, these steps might vary slightly. But that’s a quick glimpse at the process.

Additional Steps for Closing the Business

In addition to paying any remaining taxes, the IRS advises business owners to also take care of the following:

• If the business had employees, the owners need to pay them any wages they’re still owed and pay any associated employment taxes. If the LLC provided employees with a pension or benefit plan, those plans also need to be terminated. The IRS website has instructions for terminating a retirement plan.
• If the LLC had any contractors that it paid at least $600 for services (including parts and materials) during the calendar year when the business was closed, those payments need to be reported using Form 1099-NEC, Nonemployee Compensation.
• If the LLC has an employer identification number (EIN), it must close its IRS business account by sending a letter with the business’s complete legal name, the EIN, the business address, and the reason for closing the account.
• Hang on to any business records. This includes property records and employment tax records.

Recommended articles:

• What to Do After Forming an LLC
• How to Change a Sole Proprietorship to an LLC
• How to Keep an LLC in Good Standing