Owners of limited liability companies (LLCs) are responsible for maintaining the legal status of their organizations. This requires filing regular reports, paying taxes and meeting other obligations as mandated by state laws and regulations. When an LLC fails to comply with the law, the state has the option of ending the LLC legal structure via administrative dissolution.
What Is a Limited Liability Company?
Businesses in the United States can be structured under several different organizational types. The limited liability company is the structure of choice for many owners of small and medium-sized businesses. An LLC protects the assets of a company's owners while offering tax benefits that are not typically available in traditional corporations.
As is true of other business organization types, individuals and partners who want to establish a limited liability company must file an application with the state in which they plan to do business. Each state has its own laws and regulations regarding the administration of an LLC, but typical requirements include:
- Filing an annual business report, which is usually a straightforward process of providing the state with updated information about the status of the business.
- Paying all appropriate taxes, which may include federal, state and local taxes, including sales taxes, employment taxes and other liabilities.
- Appointing a registered agent for the business and ensuring that this person is reachable. A registered agent is an individual who represents the LLC and can be contacted in case a government agency, private business or private individual needs to get in touch with the LLC. In most cases, this individual also needs to be available to receive service of legal documents, such as lawsuits and inquiries.
Administrative Dissolution vs. Voluntary Dissolution
It isn't at all unusual for businesses to eventually dissolve their legal structure. This may be because the business is taking on a different legal structure.
For example, owners of an LLC may decide to become a corporation. When this happens, the owner or partners request a voluntary dissolution from the state, and then the company reemerges in a new legal form.
There are situations, however, when the state must step in and give notice of an administrative dissolution of the business. This typically happens because a business either never launched or a business has fallen out of compliance with reporting, taxation or registered agent requirements.
In most cases, administrative dissolution only occurs after the state has made numerous attempts to reach the business owners to notify them of the deficiencies. Failure to respond or rectify the issues eventually results in the LLC being dissolved by the state.
To avoid administrative dissolution of your LLC, make sure that you file your annual reports in a timely manner and update your state whenever your mailing address changes. These processes should be incorporated into your standard business operations.
Consequences of Administrative Dissolution
The immediate consequences of administrative dissolution vary depending on the state. In some states, the company must cease business activities. In addition, the protections offered by the LLC, such as limiting the personal liability of company owners for damages, may be compromised or eliminated.
Reinstating an Administratively Dissolved LLC
Some states allow owners to reinstate an LLC that has been administratively dissolved. The process is different in every state, so you need to contact your state's agency to find out if there is a process of reinstatement, as well as what that process is.
In some cases, you must cease business activities until you are notified by the state that your reinstatement has been approved.
The primary difference of administrative dissolution vs voluntary dissolution is that the former is initated by the state for failures of compliance. The latter is initiated by the LLC for reasons specific to that LLC.
The end result is that the LLC ends as a legal entity. However, there may be some downside to administrative dissolution.
Lainie Petersen writes about business, real estate and personal finance, drawing on 25 years experience in publishing and education. Petersen's work appears in Money Crashers, Selling to the Masses, and in Walmart News Now, a blog for Walmart suppliers. She holds a master's degree in library science from Dominican University.