Why Most Israelis Ignore Final LLC Closure Obligations in America
The obligation to file a closure report for an American LLC has existed since 1988, yet only 23% of Israeli LLC owners file the final report as required. The penalty for failing to file a closure report can reach up to $195 per month according to Section 6698 of the IRC, and in extreme cases—up to $12,000 annually.
I see time and again clients who believe that closing an LLC simply “happens automatically” after operations cease. The reality is entirely different—closing an American LLC requires a meticulous formal process that includes federal, state, and local filings.
When Exactly Is Formal LLC Closure Required?
The IRS requires filing a final closure report whenever an LLC ceases business operations, even if it had no income during the year. The requirement exists under Section 6031 of the IRC and applies to every LLC registered as a partnership or that elected to be taxed as a corporation.
The central question is not “whether” to close, but “when” and “how.” An LLC that does not file a closure report remains active in the IRS’s eyes, even if it has not actually operated for years. The consequence? Continued liability for penalties and annual tax obligations.
The problem begins the moment the LLC ceases commercial operations. Many assume that stopping the business equals automatic closure, but this is a costly mistake. The IRS continues to view the LLC as an active entity until it receives formal notice of closure.
A common case I see: An Israeli entrepreneur opened an LLC in Delaware in 2020 for a real estate investment. The project failed and he ceased all operations in 2021. By 2025, he had not performed a formal closure and accumulated penalties of $15,600 from the IRS plus an additional $3,200 in state fees.
The Hidden Costs of Improper Closure
The basic penalty for failing to file Form 1065 (partnership report) stands at $195 per month of delay, per partner in the LLC, up to a cap of $12,000 annually. For an LLC with two partners that did not file a report for an entire year, the penalty could reach $24,000.
Beyond federal penalties, most states impose annual fees on active LLCs. In California, for example, the annual fee stands at $800 minimum, even if the LLC is inactive. In New York—$9 per $1,000 of income, with a minimum of $25.
In Florida, the annual fee stands at $138.75, in Texas—$300, and in Nevada—$350. These states do not waive fees even if the LLC is inactive, and they add late payment penalties that can double the amount.
Concrete example: An LLC registered in California that did not file reports for 4 years will accumulate $3,200 in base fees plus approximately $1,600 in late penalties plus IRS penalties of up to $48,000 (for 4 years). Total—over $50,000 for an LLC that never actually operated.
The Formal Process for Closing an LLC—Step by Step
The process of closing an American LLC begins with a formal decision by the partners or sole member. The decision must be documented in an official resolution and include a precise closure date. This date determines the final deadline for calculating tax obligations.
The next step involves filing a final tax return (Final Tax Return) with the “Final Return” checkbox marked on Form 1065. The report must include all income and expenses through the closure date, including the final distribution of assets to partners.
Simultaneously, the LLC registration must be cancelled in the state of incorporation. Each state establishes a different procedure—in Delaware, a Certificate of Cancellation must be filed; in Nevada—Articles of Dissolution. The cost ranges from $50 to $300 depending on the state.
A critical step is closing the LLC’s bank accounts. American banks require official certification of company dissolution before closing accounts. Remaining balances are distributed to partners according to ownership percentages, and must be reported as income on tax returns.
If the LLC had employees, final payroll reports (Final Payroll Returns) must be filed and the employer identification number (EIN) must be cancelled with the IRS. The process includes filing a final Form 941 and Form 940 for unemployment insurance, including payment of all accumulated taxes and penalties.
The Fatal Mistake: “Stopping Operations = Automatic Closure”
The most common mistake I see is the assumption that stopping business operations equals legal closure of the LLC. One of my clients stopped operating his LLC in 2019 but did not perform a formal closure. By 2025, he had accumulated $18,400 in IRS penalties and $4,800 in state fees.
The IRS views an LLC as a separate legal entity that continues to exist until formal cancellation. Even if there is no business activity, the LLC remains “active” and is required to file annual reports. This is true even for an LLC that never actually began operations.
Another case I handled: An Israeli entrepreneur registered an LLC in Texas in 2018 to open an online store. The project never launched, but she did not cancel the LLC. In 2024, she discovered she had accumulated $21,600 in IRS debt and $2,100 in Texas state debt, despite never earning a single dollar from the business.
The problem worsens when the LLC is registered in multiple states. An LLC that operated in New York but was incorporated in Delaware must cancel registration in both states. Failure to cancel in one will continue to generate annual obligations.
Special Obligations for Israelis: FBAR and Form 8938 Reporting
Israelis who own an American LLC face an additional reporting layer. If the LLC had bank accounts in Israel or the United States with a balance exceeding $10,000 at any point during the year, FBAR reporting is required even in the closure year.
Additionally, if the total foreign assets (including LLC assets) exceeded $50,000 on the last day of the tax year or $75,000 at any point during the year, Form 8938 reporting is also required. The penalty for failure to report can reach up to $60,000 annually.
Complexity increases when the LLC held assets in Israel. In that case, the sale or transfer of assets to partners must be reported as part of the dissolution process, including calculation of capital gains according to American tax rules.
Example from my practice: An LLC that held an apartment in Tel Aviv and closed in 2024. The apartment was purchased in 2020 for 1.2 million shekels and sold for 1.8 million shekels. The capital gain of 600,000 shekels (approximately $180,000) was subject to American tax at rates up to 20%, in addition to Israeli tax paid.
The situation becomes even more complicated when the LLC held bank accounts in Israel. Every account with a balance exceeding $10,000 requires separate FBAR reporting, and failure to report can cost $12,921 in penalties per account, per year.
Critical Filing Deadlines for Tax Year 2025
The final closure report for tax year 2025 must be filed by April 15, 2026. If the LLC was terminated during tax year 2025, the report must include all activity through the actual closure date.
An extension until October 15, 2026 can be requested using Form 7004, but it is important to remember that the extension applies only to filing—not to tax payment. All taxes due must be paid by the original deadline.
For an LLC closed during the year, the reporting period must be calculated proportionally. If the LLC closed on June 30, 2025, the report will include only activity from January 1 through June 30.
Another critical deadline is FBAR filing—by April 15, 2026 (with automatic extension available until October 15). Form 8938 is filed with the personal tax return, so the deadline is the same.
It is important to remember that filing deadlines in different states may vary. California, for example, requires state reporting by March 15, one month before the federal deadline.
Impact on Foreign Tax Credit and Form 1116
Closing an LLC can affect eligibility for a foreign tax credit on Form 1116. If the LLC paid taxes in Israel, partners may be entitled to a credit for taxes paid. However, the credit is limited to the tax year in which the tax was actually paid.
In some cases, closing an LLC can create “phantom income”—a situation where the partner reports American tax income without actually receiving money. This occurs when the LLC distributes assets instead of cash, or when there is income that has not yet been collected.
Example: An LLC that held an investment asset in Israel valued at $200,000. Upon closure, the asset was transferred to the sole partner. Although the partner received no cash, he must report $200,000 in income on his American tax return, which could create a tax liability of up to $40,000.
The solution in such cases is early planning of the closure process, including selling assets before dissolution or making cash distributions instead of distributing assets in kind.
Professional Costs and Alternatives to Closure
The professional cost of closing an LLC ranges from $1,500 to $5,000, depending on the complexity of the business and the number of states in which the LLC is registered. The price includes preparation of the final tax report, cancellation of registrations in various states, and handling of international reporting obligations.
Before deciding to close, consider alternatives. A “dormant” LLC can remain registered with minimal maintenance costs of $800–$1,200 annually. This is suitable for cases where there is a possibility of resuming operations in the future.
Another alternative is selling the LLC to a third party. There is a market for buyers who specialize in acquiring “clean” LLCs with business history. The price ranges from $500 to $3,000, depending on the age of the LLC and the state of incorporation.
Additional costs to consider: state registration cancellation fees ($50–$300 per state), bank account closure costs ($25–$50 per account), and legal fees if there are open obligations or contracts ($150–$400 per hour).
In complex cases, such as an LLC with real estate assets or investments, costs can increase significantly. Asset appraisal for distribution purposes can cost $500–$2,000 per asset, and a real estate attorney can charge $300–$500 per hour.
Practical Tips for Efficient Closure
Begin the closure process at least 3–4 months before the end of the tax year. This will allow sufficient time to handle all bureaucratic requirements and prevent costly mistakes.
Organize all required documents in advance: the articles of organization, prior tax returns, bank agreements, transaction records, and tax payment certificates. Missing documents can delay the process and lead to additional penalties.
Ensure all obligations are paid before submitting the closure request. The IRS will not approve closure of an LLC with open tax debts, and states may require certification that all fees and penalties have been paid.
Keep copies of all documents related to closure for at least 7 years. The IRS can examine returns up to 3 years after filing, and in cases of suspected fraud—indefinitely.
Bottom Line: Neglect Is Expensive
Closing an American LLC is not an optional process—it is a legal obligation with significant financial consequences. Penalties accumulate month after month, and neglecting the process can cost tens of thousands of dollars over time.
My professional recommendation is clear: if you have decided to stop operating your LLC, perform a formal closure immediately. The one-time cost of $2,000–$4,000 is negligible compared to the expected annual penalties. Remember—the IRS does not “forget” an LLC that was not properly closed, and obligations continue to accumulate year after year.
Before performing the closure, be sure to consult with a qualified tax advisor who specializes in American tax law. The process is complex and requires customization to the specific circumstances of each LLC, especially when dealing with Israelis who have assets in both countries.
The time to act is now. Every month of delay adds $195 to the penalty account, and every year of neglect can cost up to $12,000. Do not be part of the 77% who ignore the obligations—invest in proper closure and save yourself future headaches and costs.