Asset Protection: When Do I Terminate my LLC?

Many of our clients ask the question: WHEN should I notify you as our RA (Registered Agent) on our LLC (limited liability company) that I no longer need my LLC?

There is definitely a strategy behind when you elect to stop using your LLC, how you terminate the LLC, and who to notify.

The first step is to go back to why you created the LLC in the first place. Has it met its purpose? Is it still useful to you? For example, many clients use the “one shot” LLC to hold title to investment properties. It is for tax reasons but more often for LIABILITY PROTECTION. “Compartmentalization” is the great gift of the LLC to investors.

So it stands to reason that if you let the LLC terminate too soon, you may regret it and waste the money you invested in starting the LLC in the first place.

If the LLC is terminated, and someone wants to sue for some reason (crazies abound!) they have to sue someone. If the LLC is gone, they will generally sue the owner of the LLC personally. Even if their claims are frivolous, the amount of time and money you have to spend defending the claim can be greatly reduced if the LLC is still ALIVE when the suit is filed.

So most of my clients don’t mind investing another couple of years into keeping the LLC viable, i.e., maintaining the “corporate shield” for peace of mind.

And never forget that you can actually REUSE an old LLC! You always have the option to change the name of the LLC and use it again and again! Continuing to use the old name is not generally recommended unless your give the original LLC business a good long rest, i.e., at least 5 years, before reviving the name.

Many of these concerns are driven by the legal concept of The Statute of Limitations. The policy behind SOLs is that it would be terrible for the judicial system and our society if people had an unlimited time to bring up old suits, subpoena witnesses that may be dead or have dementia, or try to find evidence that is lost or corrupted. So the legislature places somewhat arbitrary deadlines on us all for when we must file certain law suits.

The questions of how long you may need your LLC to SHIELD you personally from a lawsuit is a little complicated. There are actually 3 main theories that Plaintiffs may use to sue you: (1) negligence or fraud - best to keep the LLC alive for at least 2 years; (2) You breached an oral AGREEMENT or contract – 3 year statute of limitations; and (3) written contract – 5 year statute of limitations. Most of my clients let the LLC die after 5 years even if they are uber cautious.

To let it die, just contact your Registered Agent as a courtesy and tell him that you no longer intend to use the LLC and will not be paying annual fees on it any more. Our firm has never sued a client for NOT telling us they were letting the LLC “die a natural death”, but we can’t speak for the fee arrangements of any other law firm. I suppose some other firms may sue for RA fees if they continue to invest time and services in maintaining a company and are not notified to stop. The alternative to the “natural death” termination of the LLC is to file articles of dissolution and terminate the LLC immediately. This method of termination usually involves a legal fee and a filing fee.

This answer only scratches the surface of a complex topic. Even the 5 year natural death termination is not entirely safe.