QUESTION: How to Dissolve a Delaware LLC as a Foreign Owner with No Income?
I am a foreign owner of a Delaware LLC that I used to run an online store. I closed the store and I want to dissolve the LLC. However, I do not want to pay any fees or taxes, as I did not make any income from the store. What are the steps and requirements for dissolving Delaware LLC as a foreign owner with no income?
EXPERT’S RESPONSE: If you are a foreign owner of a Delaware limited liability company (LLC) that you used to run an online store, but you have closed the store and want to end your business, you may be wondering how to dissolve your LLC without paying any fees or taxes. Dissolving your LLC means officially terminating its existence as a legal entity registered with the state of Delaware. This article will explain the steps and requirements for dissolving a Delaware LLC as a foreign owner with no income, and the tax consequences that may arise from this process.
Why Dissolve Your LLC?
There are several reasons why you may want to dissolve your LLC, such as:
- You have stopped doing business and have no plans to resume it in the future.
- You want to avoid paying annual fees and taxes to the state of Delaware and the federal government.
- You want to protect yourself from potential liabilities and lawsuits that may arise from your LLC’s activities or debts.
By dissolving your LLC, you can close your business in a legal and orderly manner, and avoid the risks and costs of keeping an inactive or non-compliant LLC.
How to Dissolve Your LLC in Delaware
To dissolve your LLC in Delaware, you need to follow these steps:
1. File and pay any outstanding and final franchise fees
Before you dissolve your LLC, you should file any final franchise tax returns and pay any outstanding franchise tax owed to the state of Delaware. Franchise tax is a fee that Delaware charges to LLCs for the privilege of doing business in the state. The minimum franchise tax for LLCs is $300 per year, and the deadline for filing and paying is June 1 of each year.
If you fail to file and pay your franchise tax on time, you may incur penalties and interest, and your LLC may lose its good standing status with the state. This may affect your ability to dissolve your LLC, as well as your ability to do business in other states or countries.
To file and pay your franchise tax, you can use the online services of the Delaware Division of Corporations or mail a paper form and a check to the Division. You can also contact the Division by phone or email if you have any questions or need assistance.
2. Hold a Member Meeting (Optional):
As the owner of the LLC, you should hold a meeting of members to vote on the decision to dissolve the LLC. The meeting should be documented with meeting minutes, which should include the date, time, place, attendees, agenda, resolutions, and votes of the meeting. You should keep a copy of the meeting minutes in your LLC’s records, as well as any written consents or proxies from the members who could not attend the meeting.
In Delaware, LLCs are governed by the Delaware Limited Liability Company Act (LLC Act), which does not specifically require holding a meeting of members to dissolve an LLC. Under the LLC Act, an LLC may be dissolved upon the happening of certain events, including the passage of a resolution by the LLC members. The resolution should be properly documented in the LLC’s records, but it does not necessarily have to be done through a formal meeting.
Therefore, it is possible to dissolve your LLC in Delaware by passing a resolution rather than holding a meeting of members. However, you should check your LLC’s articles of organization and operating agreement, which are the documents that establish and govern your LLC, to see if they have any specific rules or procedures for dissolving the LLC. For example, your operating agreement may require a certain percentage of members to approve the dissolution, or a certain notice period before the dissolution takes effect. You should follow any such rules or procedures to avoid any disputes or legal issues with your co-owners or creditors.
3. File Certificate of Cancellation
After the passage of a resolution by the LLC members to dissolve the LLC, you must file a Certificate of Cancellation with the Delaware Division of Corporations. The Certificate of Cancellation is a form that notifies the state that your LLC is terminating its existence and ceasing its business operations. The form requires the following information:
- The name of the LLC
- The date of filing of the LLC’s original certificate of formation
- The date of filing of the LLC’s certificate of cancellation
- The effective date of the certificate of cancellation
- The name, address, and signature of the authorized person filing the certificate of cancellation
You can download the Certificate of Cancellation form from the Division’s website, or use a service provider to prepare and file the form for you. The current fee (as of the time of this article) to file the Certificate of Cancellation with the Division is $200.00. You can pay the fee by check, money order, or credit card. You can file the form online or by mail.
It is important to ensure that the fee is paid in full and the form is properly completed and submitted in order to dissolve the LLC in accordance with Delaware state laws. If you fail to file the Certificate of Cancellation, your LLC may remain active and liable for annual fees and taxes.
4. File any final federal tax returns or information returns
In addition to filing any final franchise tax returns and paying any outstanding franchise tax owed to the state of Delaware, it is also important to file any final federal tax returns or information returns with the Internal Revenue Service (IRS). The type and number of forms that you need to file depend on your LLC’s tax classification and ownership structure. Here is a summary of some of the forms that may be required:
- Proforma 1120 and 5472: If your LLC is a foreign-owned single-member LLC, which means that you are the sole owner of the LLC and you are not a US citizen or resident, you may need to file a proforma 1120 and Form 5472 with the IRS. A proforma 1120 is a dummy tax return that shows zero income and zero tax liability for the LLC, but provides the IRS with information about the LLC’s name, address, EIN, and tax year. Form 5472 is an information return that reports the transactions between the LLC and its foreign owner, such as contributions, distributions, loans, or payments.
- Form 1065: If your LLC is treated as a partnership for federal tax purposes, which means that you have at least one other co-owner of the LLC and you have not elected to be taxed as a corporation, you will need to file a final Form 1065 with the IRS. Form 1065 is a tax return that reports the income, expenses, gains, losses, credits, and deductions of the LLC, and allocates them to each member according to their ownership interest. You also need to attach a Schedule K-1. K-2 and K-3 for each member, which shows their share of the LLC’s income and deductions, and provide a copy of the Schedule K-1. K-2 and K-3 to each member.
- Form 1120: If your LLC has elected to be treated as a C corporation for federal tax purposes, which means that you have chosen to have your LLC taxed as a separate entity from its owners, you will need to file a final Form 1120 with the IRS. Form 1120 is a tax return that reports the income, expenses, gains, losses, credits, and deductions of the LLC, and calculates the tax liability of the LLC. You also need to report any dividends or distributions that you have received from the LLC, and pay personal income tax on them.
5. Close EIN account
If your LLC has an Employer Identification Number (EIN), which is a nine-digit number that identifies your LLC for tax purposes, you need to close your EIN account as part of the dissolution process. To close your EIN account, you need to send a letter to the IRS that includes the following information:
- The legal name of the LLC
- The EIN of the LLC
- The business address of the LLC
- The reason for closing the account
- The date the LLC ceased business operations
You also need to ensure that all federal tax obligations associated with the EIN have been fulfilled before closing the account, such as filing and paying any final tax returns or information returns and reporting and paying any employment taxes
Step 6: Notifying Creditors and Closing Accounts
Inform any creditors or vendors associated with your LLC about its dissolution. This helps ensure there are no lingering financial obligations or confusion moving forward. Additionally, close any bank accounts or business lines of credit linked to the LLC.
Alternative Scenario: Letting the LLC Lapse
The process of filing these forms is not very complicated, but it does require some attention and accuracy. The link below contains a comprehensive guide to completing the forms.
- Delinquent Tax Penalties: Delaware will assess late fees and penalties for unpaid franchise taxes, which can accumulate over time.
- Administrative Dissolution: After some period of non-compliance, Delaware may administratively dissolve your LLC, leaving you with a potentially messy legal situation. administrative dissolution of a Delaware LLC leads to significant legal implications. Firstly, there’s a loss of limited liability protection, which can expose members’ personal assets to creditors’ claims. Additionally, the dissolved LLC loses its legal authority to operate, rendering any post-dissolution business activities potentially invalid or unauthorized. This situation also creates complexities in contractual relationships, as the LLC may be seen as lacking the capacity to uphold or enter into new contracts.
- Name Availability: Your LLC’s name becomes available for others to claim, potentially causing confusion or even identity theft.
Seeking Professional Help: When to Consider a CPA
While dissolving a Delaware LLC without income can be manageable on your own, consulting a Certified Public Accountant (CPA) can offer valuable guidance and peace of mind, especially if:
- You have complex tax situations.
- You’re unsure about the specific forms or procedures involved.
- You want to minimize the risk of errors or missed steps.
While dissolving a Delaware LLC without income can be manageable on your own, consulting a Certified Public Accountant (CPA) can offer valuable guidance and peace of mind, especially if:
Click here to schedule a consultation with one of our CPAs and explore how we can help you navigate the final chapter of your LLC journey
