Many entrepreneurs love launching multiple ventures. However, juggling several businesses also means increased administrative tasks, divided attention, and more complex tax and compliance obligations.
To protect themselves, business owners typically establish each new venture as a separate limited liability company (LLC), isolating assets and liabilities to prevent creditors of one business from targeting another’s assets.
However, while starting new businesses is exciting, formally closing those that are no longer active often gets overlooked. Keeping dormant LLCs might seem harmless, but it can expose you to unnecessary risks and potential liabilities.
The Risks of Maintaining an Inactive LLC
It’s crucial to understand the realities of dissolving an LLC, as misconceptions can lead to unintended liabilities. The truth is, an inactive LLC can continue to incur costs and pose legal risks as it remains in a state of limbo. Here are some potential liabilities and complications that can arise:
Unforeseen Lawsuits and Legal Claims
Even if an LLC isn’t actively conducting business, it remains a legal entity that can be sued. For example, suppose your inactive LLC was involved in a contract dispute before ceasing operations. Years later, the other party decides to pursue legal action. Since the LLC still exists, you could be drawn into costly litigation. Additionally, if you haven’t kept up with legal obligations—like maintaining a registered agent—you might not receive notice of the lawsuit, leading to default judgments against your company.
Tax Complications and Penalties
Inactive LLCs are still required to file annual reports and tax returns in Michigan. Failure to do so can result in penalties and interest accruing over time. The Michigan Department of Treasury doesn’t automatically know that your LLC is no longer operating and will expect you to fulfill your tax obligations until you formally dissolve the entity.
Administrative Costs and Loss of Good Standing
Maintaining an inactive LLC means you’re responsible for ongoing administrative tasks, such as filing annual statements with the Michigan Department of Licensing and Regulatory Affairs (LARA) and paying associated fees. Failing to fulfill these duties can cause your LLC to lose its good standing, which can have legal repercussions.
Potential Personal Liability
One of the main benefits of an LLC is the protection it offers members from personal liability. However, failing to properly maintain the LLC or allowing it to fall out of good standing can jeopardize this protection. Creditors may attempt to “pierce the corporate veil” and hold members personally liable for the LLC’s debts or obligations if the LLC isn’t properly dissolved.
Unknown Creditors
Over time, you may forget about debts or obligations the LLC incurred. These could include outstanding vendor invoices, lease obligations, or contractual commitments. Creditors can emerge years later seeking payment, and without a formal dissolution, these claims remain valid.
How to Dissolve an LLC in Michigan
Dissolving an LLC in Michigan is the act of officially bringing an end to your LLC in the state. The process begins where the business itself began—with the LLC’s foundational documents, such as the Articles of Organization and Operating Agreement.
Authorize the Dissolution
Check your operating agreement or Articles of Organization for provisions regarding dissolution. For a single-member LLC, you can authorize the dissolution yourself. For multi-member LLCs, follow the outlined procedures for obtaining consent, which may include notice requirements and voting protocols. If no such provisions exist, Michigan’s LLC Act requires a unanimous vote by all members.
File a Certificate of Dissolution
Once authorized, file a Certificate of Dissolution with the Michigan Department of Licensing and Regulatory Affairs (LARA). The certificate must be signed by an authorized party and include required information, such as the reason for dissolution. While not mandatory, LARA provides a Certificate of Dissolution form to simplify the process.
Settle Debts and Distribute Assets
Begin winding up the LLC’s affairs:
- Pay Outstanding Taxes: Prioritize settling any tax obligations with the state and federal government.
- Settle Debts with Creditors: Pay off any remaining debts. If assets are distributed to members before creditors are paid, creditors can pursue members personally for the amounts owed.
- Distribute Remaining Assets: After all liabilities are satisfied, distribute any remaining assets to members according to the ownership percentages or as stipulated in the operating agreement.
Implement a Claims Procedure
Michigan law allows dissolving LLCs to limit future claims by notifying creditors in writing of the dissolution and providing a deadline for submitting claims. This process can help prevent unknown claims from arising after the dissolution is complete.
Request Tax Clearance
Within 60 days of filing the Certificate of Dissolution, request a tax clearance from the Michigan Department of Treasury. This confirms that all state taxes have been paid and helps prevent future tax issues.
Adhering to these procedures must be followed to dissolve an LLC in Michigan—and keep in mind that there are federal requirements too. The IRS provides a checklist for closing a business, which includes filing final employment tax returns, canceling your Employer Identification Number (EIN), and more.
As the IRS states, “Closing your business can be a difficult and challenging task.” That’s why it’s important to work with an experienced and knowledgeable lawyer to ensure the proper steps are taken.
Conclusion
Allowing an inactive LLC to linger can expose you to unnecessary risks and liabilities. By proactively dissolving the entity, you protect yourself from potential legal actions, tax complications, and personal liability. Don’t wait for an unwelcome surprise from a creditor or the IRS. Take control of the situation by properly winding down your inactive LLC.
For assistance with dissolving your LLC or navigating the complexities of business law, contact Zana Tomich.
