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Limit Your Liability by Dissolving Your Inactive Michigan LLC

Written by Zana Tomich on February 14, 2022 Category: General Counsel and Advice, Small Businesses, Startup Law

There’s a reason the term “serial entrepreneur” is so common: certain people love starting multiple business ventures—sometimes juggling multiple businesses at once. Owning more than one business can have benefits, such as diversifying an entrepreneur’s income streams and better utilizing certain fixed overhead costs, such as shared office space.

But it also can get complicated, since an owner must divide their attention, maintain multiple books and records for the businesses, and comply with more tax filing requirements, among other things.

One of the reasons things get complicated, and additional administrative work is required, is that  business owners typically start a new limited liability company (LLC), or other type of legal entity, for each business. This allows them to keep each business’ assets separate, and therefore avoid a situation where a creditor of one business can seek to recover assets from another business to satisfy the debt.

While business owners—especially those who are serial entrepreneurs— tend to be really excited about starting businesses, many are not, understandably, nearly as enthusiastic about ending them. As a result, it’s not uncommon for business owners to have a portfolio of four or five active LLCs in place, although only one or two are operational. And while it’s not uncommon to hang onto inactive LLCs, doing so increases certain risks. As discussed below, business owners should wind down their inactive LLCs in order to avoid risks—including the potential for personal liability.

The Risks of Maintaining an Inactive LLC

It’s easy to assume that there are no risks to “mothballing” a dormant business, but an inactive LLC can continue to incur costs and pose legal risks as it remains in a state of limbo. Entities that fail to remain in good standing may incur penalties in some states. Tax returns need to be filed. Outstanding tax liabilities will continue to accrue interest. Members of the LLC may be unaware of lurking claims that could arise against them. Additional creditors may surface over time.

Unless you’re fairly certain that you will use the LLC for some purpose moving forward, it is best to dissolve the legal entity and formally wind down the business.

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 of Michigan. That process begins where the business itself began—with the LLC’s formational documents, the articles of incorporation and operating agreement.

It’s likely that within one of those documents there is a provision that lays out the process for authorizing an LLC’s dissolution. If it is a single member LLC, the member can simply authorize the dissolution and move forward with the process. If there are multiple members, the dissolution provision likely spells out notice and voting requirements for the members to take action. In the absence of a provision in the formational documents (or if there are no such documents, then the Michigan’s LLC Act’s default rule of requiring a unanimous vote by all members applies.

Once an LLC is properly authorized to dissolve, a certificate of dissolution must be filed with Michigan Department of Licensing and Regulatory Affairs (LARA). The certificate, which must be signed by an authorized party, must include certain information such as the reason for the dissolution. While it’s not required, LARA has a certificate of dissolutionform available.

A key part of the dissolution process is dealing with outstanding debts and distributing assets. In terms of priority, outstanding taxes must be paid first, followed by outstanding debts owed to creditors (including members, appropriate), and then remaining assets are distributed to members. To the extent that members distributes assets to themselves but fail to pay known creditors what they are owed, such creditors can pursue the members for the assets they were distributed to satisfy the debts.

While dissolution under state law is different from bankruptcy under federal law in that there is no automatic stay nor discharge, the Michigan LLC Act does include a provision that authorizes an LLC that is winding down to implement a claims procedure by notifying its creditors in writing of its dissolution and explaining the process for submitting claims. This process can help limit the amount of claims and bar claims from being asserted past a certain deadline.

A tax clearance also must be requested from the Michigan Department of Treasury within 60 days of filing the certificate of dissolution.

Dissolving an Inactive LLC is Good Business

As you can see, there are a number of procedures that must be followed to dissolve an LLC pursuant to state law in Michigan—and we didn’t even address requirements under federal law. For your reference, there is a checklist of steps that must be completed in order to close a business available on the IRS website.

As the IRS states, “Closing your business can be a difficult and challenging task.” That’s why it’s important to work with an attorney to ensure the proper steps are taken.

As long as an LLC exists, whether it is active or not, there are risks that over time it will incur additional liabilities. It is almost never a good idea to allow an LLC to linger as an operationally inactive entity . Rather than waiting for an unwelcome surprise from the IRS relating to an unpaid tax liability from years past, or an unknown creditor asserting a claim, take the necessary steps to tie up those loose ends. For assistance, contact Zana Tomich

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