How to Dissolve Your Delaware Corporation or LLC

If you have a Delaware corporation or LLC that you no longer need, it’s important to formally dissolve the entity rather than simply letting it become inactive. Failing to properly close your business can lead to continued filing obligations, taxes, and potential legal liabilities.

In this comprehensive guide, we’ll walk through the detailed steps required to shut down a corporation or LLC formed in Delaware. The process is largely the same for both entity types, with a few key differences noted throughout.

Hold a Board or Member Meeting and Vote on Dissolution

The first critical step in dissolving your Delaware company is for your governing body to officially approve the dissolution. The specific procedures for this vote will depend on your entity type and governing documents.

Corporations

For a corporation, the board of directors must adopt a resolution to dissolve and then submit it to the shareholders for a vote. A majority of the outstanding shares (not just those present at the meeting) must approve the dissolution, unless your Certificate of Incorporation requires a higher percentage.

Your corporate bylaws may have additional rules around notice periods or meeting procedures that you need to follow. Consult those documents and adhere carefully to the requirements to ensure your vote is properly conducted.

LLCs

For an LLC, the dissolution process is governed by your LLC Operating Agreement. Typically, it requires the consent of all LLC members (owners) to dissolve the company. However, your operating agreement may allow for dissolution with a lesser majority or supermajority vote. Refer to that document and follow the specified procedures to the letter.

If you don’t have an operating agreement, Delaware’s LLC Act allows for dissolution with the consent of members owning more than 2/3 of the then-current percentage in the profits of the LLC. But it’s always better to have your management and voting procedures clearly outlined in a written operating agreement.

Key Points for All Entities

Regardless of your entity type, there are a few key items that need to be addressed in your dissolution meeting and documents:

• Formally approving the dissolution of the company
• Appointing an individual to handle the winding up process (typically an officer or manager)
• Authorizing that individual to file the necessary dissolution documents with the state
• Approving a plan for settling any outstanding debts and liabilities
• Adopting a plan for distributing any remaining assets to shareholders or members

Be sure to carefully document this meeting with detailed minutes and attach a copy of the approved dissolution resolution. You’ll need to submit the resolution to the Delaware Division of Corporations in a later step.

File a Certificate of Dissolution or Cancellation with Delaware

Once you have the formal approval to dissolve, you must notify the state of Delaware by filing the appropriate form with the Division of Corporations:

• For corporations: Certificate of Dissolution
• For LLCs: Certificate of Cancellation

These forms can be submitted online through the state’s website, by mail, or in person. You’ll need to provide your company name, the date the dissolution was authorized, and certification that the dissolution was approved by the appropriate voting group.

For corporations, you’ll also need to indicate whether you have any remaining assets that still need to be distributed to shareholders. If you have already distributed all assets, you can check the box for “No assets remaining for distribution.” If you still have assets to distribute, you’ll need to complete the distribution process before you can file this form.

When filling out the dissolution form, be meticulous in using the exact legal name of your business as it appears in your formation documents. Even a small deviation can cause processing delays or rejections.

Delaware charges a $204 filing fee for corporations and $200 for LLCs to process a dissolution or cancellation. You can pay this by credit card if filing online, or by check or money order if filing by mail. Always verify the current fees on the Division of Corporations website before submitting payment.

If you want expedited processing, Delaware offers several tiers of service for an additional fee:

• 1 Hour: $1000
• 2 Hour: $500
• Same Day: $100
• Next Day: $50

These expedited fees are in addition to the base filing fee. If you submit your filing by mail without an expedite request, it will be processed in the standard queue which is typically 5-7 business days.

Your dissolution will be effective on the date the state accepts and files your Certificate of Dissolution or Cancellation, unless you indicate a future effective date on the form. This gives you some flexibility in timing if you need to coordinate the dissolution with other business matters.

Notify Creditors and Settle Outstanding Debts

Before you can fully wrap up your business affairs, you have a duty to settle any outstanding debts and liabilities of the company. This includes providing adequate notice to creditors and claimants of your intent to dissolve.

Start by sending written notice to all known creditors, vendors, suppliers, and anyone else to whom the company owes money. This notice should inform them of your intent to dissolve and give instructions and a deadline for submitting any claims against the company.

To cover your bases with unknown creditors, you can also publish a notice of dissolution in a local newspaper of general circulation in Delaware. This puts the public on notice of your dissolution. Under Delaware law, claimants then have 60 days from the later of the written notice or publication date to make any claims against the dissolving company.

If claims are submitted, you’ll need to pay or make reasonable provisions to pay those debts before distributing any remaining assets to shareholders or members. If the company doesn’t have sufficient assets to cover the claims, you may need to sell off assets or pursue other means to satisfy those debts.

It’s critical that you don’t shortchange creditors in an attempt to funnel more money to shareholders or members. If the company is later sued for unpaid debts, a court could unwind those distributions and hold the owners personally liable.

If someone does sue your dissolved company for unpaid obligations, you may need to revoke the dissolution and address that lawsuit before you can close the books for good. Delaware allows companies to withdraw their dissolution within 3 years of the filing date, as long as a majority or more of the governing body approves the revocation.

Distribute Any Remaining Assets to Shareholders or Members

After any creditor claims are settled or provided for, you can distribute the company’s remaining assets to the shareholders or LLC members as part of the wind down process.

Corporations

For corporations, any remaining assets must be distributed to shareholders in proportion to their ownership stake in the company. This includes cash, property, and any other assets left after satisfying debts and liabilities.

The distribution plan should account for any differences in share class or preferences that may affect the order or amount that certain shareholders are entitled to receive. Your Certificate of Incorporation, bylaws, or any stock purchase or redemption agreements should outline the priority of distributions.

LLCs

LLCs should refer to their operating agreement for guidance on distributing assets in a dissolution. A well-drafted operating agreement will provide a roadmap for who gets what and in what order when winding down the business.

If your operating agreement is silent on dissolution distributions, Delaware’s LLC Act provides a default rule that assets should be distributed in the following order of priority:

1. To creditors, including LLC members who are creditors
2. To members for any required returns of their contributions to capital
3. To members in proportion to their respective rights to share in distributions before dissolution

Again, it’s always best to have these provisions mapped out in your operating agreement rather than relying on the default rules. Putting an agreement in place at the outset of your LLC can prevent disputes and uncertainty down the road.

Importance of Documentation

Regardless of your entity type, keep detailed records of how you arrived at your distribution plan and the specific distributions made to each shareholder or member. This should include a final accounting statement showing the company’s assets, debts, and equity at the time of dissolution.

This documentation is important for a few reasons. First, it creates a paper trail in case there are any future disputes about the dissolution process. Second, your shareholders or members will need this information for their individual tax returns for the year the company dissolves.

Distributions from a dissolving company are generally taxed as capital gains on the recipient’s tax return. They’ll need to know their individual share of the distributions and the company’s final tax basis to calculate those gains. Providing a clear accounting statement can help prevent issues with the IRS down the line.

File Final Federal, State, and Local Tax Returns

Even though your corporation or LLC is dissolving, it still has some final tax obligations to take care of. In the year you dissolve, you’ll need to file one last round of federal, state, and potentially local tax returns.

Federal Tax Filings

• For corporations (Form 1120 or 1120S): Check the “final return” box on the first page of the return. You’ll also need to answer some additional questions about your dissolution and distributions on Schedule K.
• For multi-member LLCs (Form 1065): Check the box indicating this is your final return. You’ll also need to file Schedule K-1s for each member showing their share of the LLC’s income, deductions, and distributions for the final tax year.
• For single-member LLCs (Schedule C): You’ll report any income and expenses from the LLC on your personal tax return as usual. There’s no separate final return for the LLC itself.

If your company has employees, you’ll also need to file final employment tax returns and W-2 forms. This includes Form 940 for federal unemployment taxes and Form 941 for quarterly payroll taxes. Be sure to check the box indicating these are final returns so the IRS knows not to expect future filings.

State and Local Tax Obligations

On the state level, most Delaware corporations will need to file a final corporate income tax return (Form CDA 1100) for the year of dissolution. The state’s corporate income tax rate is 8.7% of federal taxable income apportioned to Delaware.

If your corporation was exempt from this tax or if you were filing as an LLC, you likely won’t need to file a separate Delaware annual tax return. However, you should still formally cancel your business license with the state to avoid future filing notices.

Don’t forget to also cancel any other state or local business licenses, permits, or registrations that your company holds. This includes things like seller’s permits, health licenses, or zoning permits. Reach out to the issuing agency for each license to notify them of your dissolution and confirm any final filing requirements.

Depending on your industry and where you were operating the business, you may also have some local tax obligations to wrap up. This could include final sales tax returns, property tax filings, or city business taxes. Check with your local tax authority to confirm any final filing requirements.

Other Key Tax Considerations

• Obtain tax clearance: Some states require dissolving businesses to obtain a tax clearance or consent to dissolution from the state tax agency. This certifies that the company is current on all state taxes and has filed all necessary returns. Delaware generally doesn’t require tax clearance for dissolution, but it’s still a good idea to double check with the Division of Revenue that your account is in good standing.
• Cancel EIN: Your employer identification number (EIN) is like a social security number for your business. Once you’ve filed your final tax returns and made your final tax payments, you should close your EIN account with the IRS. This can be done by sending a letter to the IRS with your EIN, the legal name of your business, the reason you’re closing your account, and a copy of your EIN assignment notice if you have it.
• Keep records: Just because your business is dissolved doesn’t mean you can toss all your tax records. The IRS generally recommends keeping copies of your tax returns and supporting documentation for at least 3 years from the filing date. But some records, like property records or employment tax filings, may need to be kept longer. Consult with your tax advisor on a record retention schedule for your specific business.

Wind Down Remaining Business Affairs and Retain Records

Once you’ve filed your dissolution paperwork and final tax returns, you can finish winding down any remaining business affairs. This includes tasks like:

• Closing business bank accounts and credit cards
• Canceling any recurring charges, subscriptions, or leases
• Settling any outstanding bills or invoices
• Collecting any accounts receivable
• Terminating employee benefit plans
• Distributing or disposing of any remaining business assets
• Notifying customers, vendors, and other key stakeholders of your dissolution
• Updating your website and other public facing platforms to reflect the closure
• Maintaining a registered agent for service of process for a period of time after dissolution

While it may be tempting to just walk away once you’ve filed your dissolution paperwork, it’s important that you see the wind down process through properly. Loose ends left untied can come back to cause problems down the road.

It’s also critical that you retain key corporate records even after you’ve dissolved. This includes things like:

• Articles of Incorporation or Organization
• Bylaws or Operating Agreement
• Meeting minutes and resolutions
• Stock or membership certificates and transfer records
• Financial statements and accounting records
• Tax returns and supporting documentation
• Contracts, leases, and other legal agreements
• Certificate of Dissolution or Cancellation

Delaware law requires corporations to maintain their books and records for at least 3 years following dissolution. LLCs don’t have a specific statutory retention period, but it’s still best practice to hold onto key records for several years in case of any future legal issues or tax audits.

Many of these records contain sensitive financial or personal information, so be sure to store them securely. Consider scanning physical records into a digital format for easier storage and organization. And if you do dispose of any records down the line, use a secure shredding service to prevent identity theft.

Risks and Pitfalls of Failing to Properly Dissolve

Dissolving a Delaware company isn’t something to be taken lightly. Failing to follow the proper steps and tie up all the necessary loose ends can open you up to a host of potential problems, including:

Continued Filing Obligations and Fees

If you don’t formally dissolve with the state, your company will still be considered active on their records. This means you’ll continue to accrue annual franchise tax fees and filing obligations, even if you’re no longer operating the business.

Delaware may eventually mark your company as delinquent or void for failing to file annual reports, but those missing filings and fees will still add up. If you later decide to dissolve or revive the company, you’ll be on the hook for all those back obligations before you can move forward.

Legal and Financial Liabilities

An improperly dissolved company is still open to lawsuits and creditor claims. This means that even if you’ve stopped operating the business, someone could still come after the company for unpaid debts, broken contracts, or other liabilities down the road.

In some cases, this liability can even extend to the company’s directors, officers, or members personally. If the company’s assets have already been distributed, a creditor could try to claw back those assets or sue the owners directly to satisfy the debt.

By properly dissolving and settling all outstanding obligations, you cut off the ability for new liabilities to accrue against the company. You also give creditors and claimants proper notice and a chance to bring any issues to light so they can be dealt with during the dissolution process.

Fraudulent Activity or Identity Theft

Failing to formally dissolve your company also leaves the door open for bad actors to hijack your business identity and use it for fraudulent purposes. This is especially true if you’ve simply abandoned the company without filing any dissolution paperwork.

Someone could potentially file false documents with the state to take over control of your company and use it to open credit accounts, enter into contracts, or even conduct illegal activities under your business name. This can damage your reputation and credit, and even lead to legal trouble if the company is used for criminal purposes.

By properly closing out the business and all of its accounts and registrations, you can help prevent this type of business identity theft. It’s also a good idea to periodically check your company’s status on the Delaware Division of Corporations website even after you’ve dissolved to make sure no suspicious filings have been made in your name.

Estimated Timeline and Costs for Dissolution

The time and costs involved in dissolving your Delaware company will depend on a variety of factors, including:

• The complexity of your business operations and assets
• How organized your records are
• How many shareholders or members need to approve the dissolution
• Whether you have any outstanding debts or legal issues to resolve
• How quickly you need the dissolution processed

In general, you can expect the process to take several weeks to a few months from start to finish. This includes time to:

• Hold your board or member meeting and vote on dissolution
• Prepare and file your Certificate of Dissolution or Cancellation with the state
• Give proper notice to creditors and resolve any claims
• Distribute any remaining assets to shareholders or members
• File final tax returns and cancel registrations
• Wind down any remaining business affairs

If you have a very simple business with minimal assets and liabilities, you may be able to wrap things up more quickly. But it’s important not to rush the process and risk overlooking important steps.

In terms of costs, Certificate of Short Form Dissolution can be filed for $10. Delaware charges a $224 filing fee for a regular Certificate of Dissolution (corporations) or a $220 fee for a Certificate of Cancellation (LLCs). If you request expedited processing, you’ll need to pay an additional fee ranging from $50 to $1000 depending on how quickly you need it done.

You may also incur additional costs for things like:

• Registered agent fees for service of process after dissolution
• Legal fees for assistance with the dissolution process
• Accounting or tax preparation fees for your final returns
• Any fees associated with transferring or selling business assets
• Postage and publication costs for providing notice to creditors

While it may be tempting to try and handle the dissolution process on your own, working with experienced legal and financial professionals can help ensure you don’t miss any critical steps. This can save you significant time, money, and headaches in the long run.

The Bottom Line

Dissolving a Delaware corporation or LLC involves more than simply filing a form with the state. It requires careful planning, attention to detail, and a commitment to tying up all the legal and financial loose ends.

Some key steps and considerations in the dissolution process include:

• Holding a formal meeting of the directors and shareholders or members to approve the dissolution
• Filing a Certificate of Dissolution or Cancellation with the Delaware Division of Corporations
• Notifying creditors and resolving any outstanding claims or liabilities
• Distributing remaining assets to shareholders or members in accordance with your governing documents and Delaware law
• Filing final federal, state, and local tax returns and closing out business registrations and accounts
• Securely maintaining key business records for at least 3 years after dissolution

The consequences of failing to properly dissolve can be significant, ranging from continued filing obligations and fees to potential lawsuits and personal liability for business debts. In extreme cases, an abandoned business entity can even be hijacked for fraudulent purposes.

While the dissolution process does take some time and effort, it’s well worth it for the peace of mind and finality it provides. By taking a methodical approach and working with experienced professionals, you can avoid common pitfalls and ensure your business is wrapped up properly.

Looking Ahead

As you close one chapter of your entrepreneurial journey, it’s natural to reflect on the lessons learned and consider what the future may hold. Dissolving a business is never an easy decision, but it doesn’t have to be the end of the road.

Many successful entrepreneurs have been through multiple business ventures before finding the right formula. Each experience provides valuable insights and skills that can be applied to future endeavors.

As you navigate the dissolution process, take time to reflect on what went well, what could have been improved, and what you might do differently next time. Some key questions to consider:

• What were the biggest challenges we faced, and how could they have been anticipated or mitigated?
• What were our greatest strengths and competitive advantages?
• How well did our team function, and what qualities do I want to look for in future business partners or employees?
• How did our product or service offerings resonate with customers, and what changes might have improved market fit?
• What financial or operational processes could have been more efficient or effective?

The answers to these questions can provide a roadmap for your next venture, whether that’s starting a new business, investing in other companies, or pursuing different professional opportunities.

It’s also important to take care of yourself and your team during the dissolution process. Closing a business can be an emotional and stressful experience, especially if it involves layoffs or financial losses. Don’t hesitate to seek support from friends, family, or professional advisors as you navigate this transition.

Finally, remember that setbacks and failures are a natural part of the entrepreneurial journey. No one gets it right every time, and even the most successful business leaders have had their share of missteps and disappointments.

What sets successful entrepreneurs apart is their ability to learn from those experiences, adapt, and keep moving forward. By approaching your business dissolution with a growth mindset and a commitment to continuous improvement, you can emerge stronger and better prepared for whatever comes next.

Wrapping It Up

Dissolving a Delaware corporation or LLC is a complex process with a lot of moving parts, but it’s a critical step for any business that has reached the end of its lifecycle. By understanding the key requirements and best practices, you can ensure your dissolution is handled smoothly and minimize the risk of future legal or financial problems.

Some key takeaways:

• Follow the proper corporate formalities for approving and documenting the dissolution
• File the appropriate forms and pay any required fees to the state
• Notify creditors and resolve outstanding claims and liabilities
• Distribute assets to shareholders or members in accordance with your governing documents and state law
• File final tax returns and close out business licenses and accounts
• Maintain key records in a secure manner for at least 3 years after dissolution

While the dissolution process can seem daunting, resources are available to help. The Delaware Division of Corporations website provides forms, fee schedules, and guidance for dissolving your business entity. And experienced legal and financial professionals can provide invaluable advice and support throughout the process.

As you close this chapter of your business journey, take pride in the entrepreneurial spirit and hard work that got you here. The skills, knowledge, and resilience you’ve developed will serve you well in your next endeavor, whatever that may be.

With careful planning and execution, you can dissolve your Delaware company with confidence and move forward to new opportunities. Here’s to the next chapter of your entrepreneurial journey!

FAQ

What happens if I don’t dissolve my Delaware company properly?

If you don’t follow the proper steps to dissolve your Delaware company, it will continue to exist as a legal entity in the state’s records. This means you’ll still be responsible for filing annual reports, paying franchise taxes, and complying with other state requirements. Failing to do so can result in fines, penalties, and even legal liabilities.

Do I need to notify the IRS when I dissolve my Delaware company?

Yes, you should notify the IRS when you dissolve your Delaware company. This typically involves filing a final tax return and checking the “final return” box to indicate that the company will no longer be operating. You should also close out any other federal tax accounts, such as payroll tax accounts, and cancel your Employer Identification Number (EIN). Here is a detailed overview of the necessary steps:

1. File Final Tax Returns:

• Corporate Income Tax Return: File the corporation’s final Form 1120 (U.S. Corporation Income Tax Return) and check the “Final Return” box. This must include income up to the date of dissolution.
• Employment Taxes: If the corporation has employees, you must file final employment tax returns (Forms 940, 941, or 944) and indicate that these are the final returns.
• Other Taxes: If applicable, file final excise tax returns.

2. Form 966, Corporate Dissolution or Liquidation:

• File Form 966 with the IRS within 30 days of adopting the resolution or plan to dissolve. This form notifies the IRS of the dissolution and provides basic information about the corporation and the dissolution process.

3. Pay Any Outstanding Taxes:

• Ensure that all federal taxes due, including any payroll or excise taxes, are paid.

4. Cancel Employer Identification Number (EIN):

• Send a letter to the IRS requesting the cancellation of the EIN. Include the complete legal name of the corporation, the EIN, the business address, and the reason for the closure. The letter should be sent to the IRS location where you file your return.

5. Distribute Remaining Assets:

• Distribute the corporation’s remaining assets to shareholders after paying off all creditors. This step may have tax implications for both the corporation and the shareholders, and appropriate tax forms may need to be filed to report these distributions.

Following these steps ensures you comply with IRS requirements when dissolving your Delaware corporation. It’s also wise to consult with a tax professional to ensure all tax obligations are properly addressed.

What happens to my company’s intellectual property when I dissolve?

If your Delaware company owns any intellectual property, such as trademarks, patents, or copyrights, you’ll need to decide what to do with these assets when you dissolve. You may choose to sell them, transfer them to another entity, or allow them to expire. It’s important to document any transfers or assignments properly and update any relevant registrations with the appropriate agencies.

What happens to my company’s website and domain name when I dissolve?

When you dissolve your Delaware company, you’ll need to decide what to do with any digital assets, such as your website and domain name. You may choose to sell these assets, transfer them to another entity, or simply let them expire. If you have any active contracts or agreements related to your website or domain name, be sure to review and terminate them properly.

What should I do with my company’s physical assets when I dissolve?

When you dissolve your Delaware company, you’ll need to decide what to do with any physical assets, such as equipment, inventory, or real estate. You may choose to sell these assets, distribute them to shareholders or members, or donate them to charity. Be sure to document any transfers or sales properly and update any relevant registrations or titles.

Can I dissolve my Delaware company if it’s not in good standing?

If your Delaware company is not in good standing with the state, you may need to take additional steps before you can dissolve it. This typically involves filing any overdue annual reports, paying any outstanding fees or taxes, and resolving any other compliance issues. Once your company is back in good standing, you can proceed with the dissolution process.

Do I need to publish a notice of dissolution in a newspaper?

Delaware does not require companies to publish a notice of dissolution in a newspaper. However, some states may have publication requirements for companies doing business in their jurisdiction. It’s a good idea to check with the relevant state agencies to determine if you need to publish a notice of dissolution in any other states where your company has operated.

Can I dissolve my Delaware company if it never conducted any business?

Yes, you can dissolve your Delaware company even if it never conducted any business. In fact, if your company has been inactive and has not issued any shares or conducted any business transactions, you may be able to dissolve it using a simplified process called a “short-form dissolution.”

What should I do with my company’s bank accounts when I dissolve?

When you dissolve your Delaware company, you’ll need to close out any bank accounts associated with the business. This typically involves contacting the bank, providing them with documentation of the dissolution, and following their procedures for closing the accounts. Be sure to transfer any remaining funds to a personal account or distribute them to shareholders or members as appropriate.

Can I dissolve my Delaware company if it has foreign qualifications in other states?

If your Delaware company is registered to do business in other states, you’ll need to withdraw those foreign qualifications as part of the dissolution process. This typically involves filing a withdrawal or termination form with the relevant state agencies and paying any associated fees. Be sure to check with each state where your company is qualified to determine their specific requirements.

Do I need to notify my customers or clients when I dissolve my Delaware company?

While Delaware law does not require you to notify your customers or clients when you dissolve your company, it’s generally a good business practice to do so. This can help ensure a smooth transition and minimize any disruption to your relationships. You may also need to terminate any ongoing contracts or agreements and provide information about how any outstanding orders or projects will be handled.

Can I sell my Delaware company instead of dissolving it?

Yes, selling your Delaware company is an alternative to dissolving it. If you find a buyer for your business, you’ll need to follow the appropriate legal and financial procedures for transferring ownership. This typically involves negotiating a purchase agreement, conducting due diligence, and transferring assets and liabilities to the new owner. Be sure to consult with an attorney and financial advisor to ensure the transaction is structured properly.

What should I do if I can’t locate all of my company’s shareholders or members?

If you’re unable to locate all of your Delaware company’s shareholders or members, you may need to take additional steps to complete the dissolution process. This typically involves making a good faith effort to locate the missing individuals, such as sending notices to their last known address or conducting a public records search.

Can I dissolve my Delaware company if it has outstanding tax liabilities?

If your Delaware company has outstanding tax liabilities, you’ll need to address these as part of the dissolution process. This typically involves filing any overdue tax returns, paying any outstanding balances, and obtaining tax clearance from the relevant state and federal agencies. Failure to resolve outstanding tax liabilities can result in personal liability for the company’s officers, directors, or members.