Closing Your LLC? What Should You Know About Taxes?
If you've owned and operated your own service-based business for years but have decided to finally retire, you'll likely want to liquidate any remaining assets before closing your business for good. While selling a service-based business is possible in most markets, it can be tough to find someone who will maintain your business's goodwill among the community and perform work up to the standards you've spent decades setting. However, closing your business has some potential consequences as well. Read on to learn more about the disposition of an LLC's assets and debts during the dissolution process, as well as some steps you'll need to take when filing the final tax return for your LLC.
What happens to an LLC's assets and liabilities when it is dissolved?
Dissolving an LLC has a similar legal effect as the death of a person. Whatever assets remaining at the time of the LLC's dissolution are used to pay off outstanding debts, and the remaining assets are distributed to the LLC owners (or, if an owner passes away before the dissolution is finalized, to his or her estate). One of the advantages of the LLC's corporate structure is that if the LLC's assets are insufficient to pay all its debts, the owners aren't individually or personally responsible for payment of these debts (except in a few specific situations outlined below).
If you personally cosigned on a business debt (with your LLC as the other signer), you'll share personal liability for this debt -- and if your LLC is dissolved and none of its assets are able to be placed toward paying off this joint debt, you'll become fully responsible for the entire debt. You (or your assets) will also be responsible for LLC debt if you placed these assets as collateral for a loan in your LLC's name. Fortunately, as long as regular payments are made on this loan until it's fully satisfied, your assets will be safe from seizure.
In other cases, a creditor or other interested party may file a lawsuit against you, alleging that your LLC was a "sham" corporation you used to avoid paying personal income taxes (or as a shield for other income) through a process called "piercing the corporate veil." If a judge agrees with these allegations, you'll be deemed personally responsible for all the LLC's debts that its assets can't pay, and may even have your wages garnished or bank accounts frozen until these funds can be repaid.
What will you need to do to file your LLC's last tax return?
Unless your LLC is dissolved on December 31, you'll need to file a tax return for the following calendar year to ensure you're not assessed any fines, fees, or penalties by the IRS or your state's Department of Revenue. In this tax return, you'll need to account for the liquidation or exchange of any business assets, including capital assets, to ensure that all applicable consumption or sales taxes are paid.
It's important to file a statement with your LLC's last tax return giving the name and contact information of the person maintaining tax and payroll records for your LLC (whether you, your attorney, or your accountant). This ensures that in the event of an audit, the IRS has an easy point of contact. While it can be tempting to think "out of sight, out of mind," ignoring audit notifications after your LLC has been dissolved could potentially subject you to personal liability. It's generally best to seek the assistance of a tax attorney when dissolving your LLC to ensure you don't inadvertently claim (and spend) assets that should be used to pay tax debts.