Consequences of Failing to Dissolve and Terminate an LLC

Consequences of Failing to Dissolve and Terminate an LLC

Failing to dissolve and terminate an LLC properly can lead to several significant consequences for its members, especially regarding creditor actions and legal protections. Here are the main points to consider:

1. Ongoing Tax and Regulatory Obligations: The LLC may continue to incur state fees, taxes, and penalties. States often impose annual fees or franchise taxes on LLCs, and failure to dissolve the LLC means these obligations persist.
2. Exposure to Lawsuits: If the LLC is not properly dissolved, it may still be considered active and can be sued. Members may be caught off guard by litigation against an LLC they assumed was inactive.
3. Difficulty in Re-establishing Credit or Business Reputation: An LLC that is not formally closed can negatively impact the business credit and reputation of the members, making it harder to start new ventures in the future.

What Creditors Can Do to Members of the LLC

1. Piercing the Corporate Veil: If the LLC is not properly dissolved, creditors may attempt to “pierce the corporate veil” and hold members personally liable for the LLC’s debts and obligations. This usually requires proving that the LLC was not operated as a separate entity, that there was commingling of personal and business funds, or that the LLC was used to perpetrate fraud.
2. Claims Against Remaining Assets: Creditors can make claims against any remaining assets of the LLC. If the LLC has not been properly wound up, these assets may not be properly distributed, leaving them exposed to creditor claims.

Legal Protections Members Lose by Failing to Properly Close the LLC

1. Limited Liability Protection: One of the primary benefits of an LLC is the limited liability protection it offers to its members. By failing to properly dissolve the LLC, members risk losing this protection and may be held personally liable for business debts and legal judgments.
2. Shield Against Personal Liability for Company Debts: Proper dissolution involves paying off creditors before distributing remaining assets to members. If this process is not followed, creditors may go after members personally to satisfy unpaid debts.
3. Statutory Protections: Proper dissolution ensures that the statutory protections provided by state laws are fully utilized, such as specific time frames during which claims against the LLC can be made. Without proper dissolution, these protections might not apply.

If you need assistance dissolving and terminating your LLC, don’t hesitate to contact me at 215.551.7109. Let’s discuss how I can help you navigate this process smoothly.