There may come a time when the people who own and run a business voluntarily decide to call it quits. If you choose to dissolve your corporation, you’ll need to follow specific steps to formally dissolve your corporation and wind up your business.
Corporate dissolution is a type of process wherein a corporation is completely terminated. Filing certain required papers usually mark the official dissolution or the official termination of a corporation. Dissolving a corporation is a different process than other means of ending a corporation in which part of the corporation still lives on, such as a merger or consolidation.
Dissolution doesn’t always happen due to a failure of the business or lost profits. The corporation may dissolve because it was formed for a specific purpose, and that business purpose has now been fulfilled or no longer exists.
How Is a Corporation Dissolved?
A corporation can be dissolved by:
- Voluntary decision or resolution by critical members of the corporation
- Resolution of the shareholders
- Suspension of the corporation’s activities by the state, often due to a failure to pay taxes to the state
- A business divorce
When a corporation is dissolved voluntarily, many steps need to be taken to complete the process. The organization needs to:
- Pay off whatever debts they have incurred
- Distribute assets to members according to their corporate rights
- File dissolution papers with the secretary of state
Dissolution often takes some time before it is fully completed. The exact details for dissolution and wrap-up may vary depending on the type of corporation involved and the business laws in the state.
Does the Board Meet to Discuss Dissolution?
The first step in dissolving a corporation usually involves the board of directors and shareholders voting to approve the dissolution. Under most state rules, dissolution starts by holding a meeting of the board of directors to vote on a resolution to approve the dissolution of the corporation. Once the board has approved the dissolution, the matter can be submitted to the shareholders for their approval.
The exact rules for the type of vote and action required by directors and shareholders vary state by state. Check your state rules and your articles of incorporation and bylaws in case you have any special requirements for dissolution. You will also want to ensure you provide proper notice and keep good records of any action taken on dissolution.
Do I Have to File a Certificate of Dissolution With the State?
Once you have the necessary corporate approval to dissolve your corporation, your next step is to file an official certificate of dissolution with the state. Most states have a certificate of dissolution form that you can file by mail or fill out online.
Visit your secretary of state’s website for your state’s dissolution form and filing requirements, including required fees.
What Does Winding Up Mean?
After dissolution, your corporation continues to exist to wind up its business. Winding up involves:
- Discharging all of the corporation’s liabilities and obligations.
- Resolving all outstanding claims and lawsuits against the company.
- Distributing any remaining assets to stockholders.
Another critical element of winding up includes giving notice to anyone with a potential claim against your corporation. While this may not be legally required, it helps limit your liability. It allows you to make final distributions of your corporate assets to shareholders more safely. There are strict rules about giving proper notice. Use LegalMatch to consult with a business attorney about giving proper notice to shareholders.
Do I Need Tax Clearance?
Some states require you to obtain tax clearance before filing your certificate of dissolution. Other states require you to pay all taxes due before filing your certificate. Check your state rules for dissolution and tax clearance. On your final state and federal tax filing, check the “Final Return” box to indicate that your corporation has been dissolved.
What Happens to My Bank Accounts, Permits, and Out-of-State Registrations?
Close all your business bank accounts and credit lines. Cancel any permits, licenses, or anything else held in your business’s name. Notify your customers and vendors about your company’s dissolution. Suppose your corporation is registered or qualified to do business in another state. In that case, you must file the necessary forms to terminate those registrations. Otherwise, you will continue to be liable for annual fees and business taxes in those states.
Do not forget to close all service accounts held in your business name. Terminate all licenses, permits, and permits for fictitious names, too.
If you follow each step correctly, you will successfully close your corporation.
Do I Have to Notify the Internal Revenue Service (IRS)?
Once you sign and file the dissolution forms with your state agency, notify the Internal Revenue Service (IRS) of your intended company dissolution.
It is important to pay all taxes due to the state and to the federal government to obtain a “consent to dissolution” or a “tax clearance.” Generally, these forms are required by the Office of the Secretary of State to obtain a formal dissolution of a corporation. On state and local tax return documents, mark the box “Final Return.”
What If There Is a Dispute During the Corporate Dissolution Process?
Corporate dissolution can often be a time when various conflicts and disagreements surface. As a result, many legal disputes can arise in connection with the dissolution process.
A common type of legal dispute during corporate dissolution is when there is a disagreement about the distribution of the profits and assets. Distributions are usually covered in the corporate bylaws. Still, interests within the company may have changed over time, leading to conflicts over distribution details.
Another common type of dispute is where the corporation cannot pay off debts owed to creditors or to the government. The company property may be subject to liens or repossession to satisfy debts in such cases. Significant transactions such as these generally require intervention through the legal system.
What Are the Consequences of Not Dissolving a Corporation?
There can be consequences for choosing to allow the corporation to remain inactive. In some states, a corporation could face penalties if it remains inactive. If the state administratively dissolves the corporation, owners could be personally liable for any outstanding debts and liabilities. Additional penalties and interest on accrued taxes could become the owners’ liability once the state dissolves the corporation.
Because there could be a considerable liability for owners who allow a business to become inactive, it usually is best to learn how to dissolve a corporation. It might be best to allow the corporation to remain inactive for a short period. Suppose owners have questions about whether it is best to move forward with the corporate dissolution or allow the company to remain inactive. In that case, use LegalMatch to get help from an experienced corporate law or business law attorney.
Multiple factors affect the time it takes to dissolve a corporation. Larger corporations may take much longer to dissolve than smaller corporations. The corporation’s type of business may impact the dissolution timeline. State and federal regulations also impact certain closing businesses. Business law attorneys understand how to dissolve a corporation and move through each step efficiently to bypass undue pauses and troubles.
Should I Hire a Lawyer If I Have Any Corporate Dissolution Questions?
Dissolving a corporation is a very involved and complicated process. It generally requires the assistance and oversight of a qualified lawyer. You may need to contact a corporate attorney to help you with your corporate dissolution and wind-up. Your attorney will guide you through the process and can address any legal questions that might arise at any point during the process. Also, your lawyer can provide you with representation if a lawsuit becomes necessary.
