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Very important reasons to properly dissolve your old LLC – but maybe not just yet

Published On: December 15th, 2023Categories: Real Estate LawTags: ,

So you own or have an interest in an LLC, and its purpose has ceased to exist. You no longer need this LLC. Maybe you sold the property you owned under the LLC. Maybe the business the LLC owned went under or just wasn’t profitable so you closed up shop. For any number of reasons your company no longer exists, and you don’t want to incur the inconvenience and cost of filing annual reports and tax returns for it anymore. Should you formally dissolve the LLC? If so, when?

First, let’s cover what happens if you don’t formally dissolve it. You just do nothing. You don’t even keep paying the annual registrations and you don’t file any tax returns for it anymore. After all it is generating no income, so you don’t owe any taxes on it anyway right? First off, by failing to file the annual registrations you will eventually lose the protections of the LLC. And the statute of limitations on a contract claim is 6 years, and for a slip and fall (personal injury) type claim it is 2 years. So if you allow the LLC to become defunct by failing to pay the registrations, and your LLC gets sued within the relevant statute of limitations, you may not have the protections that you formed the LLC for in the first place!

Furthermore, if the State Tax Division suspects fraud by your failing to file a return for the LLC even though it was never formally dissolved, NJSA 54:49-5 allows them to assess an “arbitrary” tax liability based on what they think a company like your LLC would normally generate. And you could owe significant and ongoing penalties for the taxes they claim you should have paid on the income you never actually made. Importantly they can go back an unlimited amount of time to do this, there is no statute of limitations for how far back they can go. I am personally aware of a taxpayer who received a notice under this statute nearly 10 years after his LLC ceased operations. So the fact that they haven’t done so yet, doesn’t mean they won’t in the future. Furthermore most banks only keep records for 7 years, so unless you keep good records yourself it will be very hard to provide evidence to fight such an arbitrary assessment. You cannot assume you will be able to obtain your bank and credit card statements online in the future, so save the statements as PDFs somewhere safe each year just in case. That can help you prove you didn’t have income from the LLC’s that year. Dissolving the LLC will grant significant protections from this possibility. And until it is dissolved, be sure to have your accountant report your income (even if that income is $0.00) on your tax return each year.

So now, what if you jump the gun and dissolve the LLC properly as soon as you don’t need it anymore? Maybe hold off on that as well. As discussed above, there is a statute of limitations on most claims that lasts for years. This means that for up to 6 years a company can be sued for breach of contract, and for up to 2 years a company can be sued for a personal injury claim. NJSA 42:2c-50 and NJSA 42:2c-51 dictate what happens when a company is dissolved. Section 50 can be a little complicated as it states what to do if you are aware of potential claims, namely there is a procedure where you can publish and serve certain notices and still maintain the LLC protections to some extent. However this post presumes you are not aware of any potential claims, and that’s where section 51 kicks in. It states that once the LLC is dissolved and its assets distributed, the liabilities of the LLC are transferred to its members personally, in proportion to their respective membership percentages in the LLC. So once you dissolve the LLC, you can become personally responsible for its liabilities whether known or unknown at the time it was dissolved.

So let’s say you dissolve the LLC the moment you sell the property it owns. And suppose someone slipped and fell on the sidewalk in front of the property the day before the closing and you had no idea. 1 year and 363 days later you find your name on a personal injury complaint. You no longer have the LLC protections, and it may be questioned whether your property insurance still has to cover you personally for the claim when the named insured – your LLC – no longer exists. This issue can also come up with your buyer, in a contract breach scenario. Let’s say 5 years and 363 days after closing the buyer sues you for breach of contract. They claim you failed to disclose known defects before you sold them the property, which were only discovered now and costed $100k to fix. Since the LLC is dissolved, you are now personally on the hook for any damages they can prove. Yes this really happens I have seen it happen.

In conclusion: Do NOT dissolve your LLC until you are sure that the statute of limitations has run on any potential legal claim that could be made against the LLC. File a $0.00 tax return for the LLC each year until it is dissolved and hold onto your bank records indefinitely, to help prove it made $0.00 if necessary. Then be sure to properly dissolve it when the time comes. Dissolution is a relatively simple on-line process with the NJ Treasury or you can have your accountant or attorney do it for you. Taking these steps doesn’t cost much, and will protect you from some common but little known potential pitfalls.

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