Maryland's LLC Dissolution Law

A Limited Liability Company (LLC) offers greater protection against personal liability than a sole proprietorship in Maryland. But that comes at a cost because forming an LLC requires an individual to jump through significantly more hoops than the easy-start sole proprietorship.

And when it's time to dissolve the business entity, Maryland law mandates additional formalities. A business person should obtain an overview of the dissolution laws and follow them to the letter.

An LLC in Maryland, as well as in other states, is a type of business structure. It can include one owner or several, and they are termed "members." The members generally get equal authority in decision-making for the business, although some LLCs opt for manager management.

The business is regulated in part by the foundational documents used to create an LLC – the articles of organization and the operating agreement.

Maryland doesn't treat an LLC as an entity separate from its members for tax purposes. That is, income from a Maryland LLC is divided among all the members. They report their income on their individual tax returns as though it were personally earned by them.

The most important feature of an LLC is that it limits the personal liability of individual members. If the LLC defaults on its debts, the creditors cannot seek reimbursement from the members personally. Only LLC assets can be attached to pay off business debts, which means that an LLC member risks only the amount of their investment in the LLC.

When a sole proprietorship closes its doors in Maryland, the business is over. No formalities are required. Outstanding creditors are not concerned by this since they can seek reimbursement from the owner of the business.

However, when an LLC terminates, the creditors have more at stake. They do not have the right to seek repayment of LLC debts from the LLC members. Their only recourse is payment with LLC assets. That is why Maryland law requires that LLC members who dissolve their business notify their creditors and appropriate state agencies.

There is no law in Maryland that requires the articles of organization and operating agreement of an LLC to spell out terms of dissolution. But some do discuss the terms of dissolution, and when that happens, the rules agreed upon in the documents control.

Typical LLC formation documents may specify how many members must vote to dissolve the LLC, or provide a future date for dissolution. However, if these documents do not specify the terms of dissolution, Maryland law kicks in.

Under Maryland statutes, absent direction in the formation documents, an LLC can be dissolved only in three ways:

• By unanimous consent by the members.
  
• An individual member successfully seeks a judicial dissolution.
• The company has no members for a period of 90 days.

Once the members of an LLC resolve to dissolve a Maryland LLC, they must take several administrative steps before doing so. First, they must prepare an Articles of Dissolution form and then file it with the Maryland State Department of Assessments and Taxation.

This document lists the name of the LLC, the date that the LLC's articles of organization were filed in Maryland, and the date for dissolution. Various affidavits are also required in Maryland regarding tangible personal property owned by the LLC. Once the articles of dissolution are filed together with the filing fee, LLC members must act to close the business.

What exactly do LLC members have to accomplish in order to wind down the affairs of their LLC before dissolution? Essentially, this comes down to addressing all remaining debts and liabilities and notifying all creditors.

The members must put together a plan to deal with all outstanding LLC debts with current LLC assets. They have to provide this plan and the proposed date of dissolution to each and every LLC creditor and lender. It is customary to also notify clients, as well as other businesses the LLC has worked with.

Finally, the members must pay outstanding wages to its employees and cancel any outstanding registrations, permits, licenses and business names currently held by the LLC. If the LLC has a manager, this responsibility will fall to them. There may be final LLC tax documents to submit as well.

All of the LLC's remaining assets can be used to pay the final LLC liabilities and debts. If the LLC has business assets remaining after all of the debts have been paid, these belong to the LLC members.

How are the assets to be distributed? Again, this is an issue that is often addressed in the articles of incorporation and/or operating agreement. These formation documents are the first place to look for instructions.

If these documents do not contain instructions about asset distribution, they should be distributed as specified in Maryland law. That is, they will be distributed in proportion to the amount of each member's capital interest in the business.

Once the LLC members have accomplished all tasks required for winding down the affairs of the company, it is time to complete the Maryland Articles of Cancellation form. The document must be signed by a member of the LLC and also by the registered agent.

The form asks for:

• Name of the LLC.
  
• Address of its registered agent.
  
• Names of the members charged with winding up the LLC's business.
  
• Statement that all known creditors were properly notified of the dissolution.
  

Note that Maryland law requires that the address of the registered agent must be an actual, physical address within the state of Maryland. Post boxes are not sufficient. The address listed should contain the name of the street, the street number, the state and the Zip code.

The completed document must then be sent to all known creditors of the LLC. After mailing to the creditors, the original form must be filed with the state Department of Assessments and Taxation (SDAT). A fee is required for expedited service. The LLC is dissolved on that day or on any future date that is specified in the documents.