What Causes Businesses to Dissolve?
Reasons for business dissolution may include financial losses, bankruptcy, lack of time or willingness to continue operations, retirement, or a career change.
In some cases, the state may force a corporation to dissolve if taxes were not paid or annual reports were not submitted, a situation known as administrative dissolution.
How Can I Prepare for Business Dissolution? What Steps Are Involved in Dissolving a Business?
Preparing for business dissolution involves several steps to ensure a smooth and legally compliant closure.
Informing the IRS/State and Local Tax Agencies
Notifying the Internal Revenue Service (IRS) and relevant tax agencies ensures your business is no longer considered active for tax purposes.
This step involves filing final tax returns, closing your Employer Identification Number (EIN) account, and submitting any outstanding tax payments.
Canceling All Business Licenses and Permits
To prevent others from using your business name, seller’s permit, or licenses in a way that holds you liable for taxes or penalties, you must cancel all licenses and permits issued to your business.
This process typically involves contacting the appropriate issuing agencies, submitting the necessary forms, and paying the required fees.
Notifications
Notifying creditors, insurers, lenders, vendors, service providers, and suppliers about the dissolution of your business allows them to take appropriate action, such as closing accounts, adjusting payment terms, or making final arrangements for goods and services.
Timely communication can help prevent disputes and maintain good relationships with these entities.
Informing Your Landlord
If your business operates from a rented or leased location, you must notify your landlord of your intent to dissolve the business.
Review your lease agreement to determine the notice period required and any potential penalties for early termination.
In some cases, you may be able to negotiate a lease termination agreement with your landlord.
Collecting any Outstanding Debts
Before dissolving your business, collect any unpaid debts from clients or customers.
This may involve sending reminder notices, negotiating payment plans, or taking legal action if necessary.
Recovering these funds can help cover outstanding liabilities and potentially provide additional funds for distribution among the business owners.
Selling Company Assets
To maximize the value of your business assets and minimize potential liabilities, consider selling or liquidating company property, equipment, or inventory.
Proceeds from these sales can be used to pay off debts, cover dissolution expenses, or be distributed among the owners. Hire a professional appraiser to accurately assess the value of your assets and consult with a business broker or auctioneer to facilitate the sale process.
A business dissolution attorney can help guide you through the necessary steps and ensure that you comply with all legal requirements, which may vary from state to state.
What Is the Proper Way to Dissolve a Business?
Dissolving a business involves several key steps, listed below.
Voting to Close the Business
If the business is operated as a corporation, LLC, or partnership, all business associates must agree on the decision to dissolve.
This decision is usually governed by organizational documents or state business statutes and should be documented in meeting minutes or through a written consent form.
Dissolving the Business with State and Local Government
This involves notifying state and local government agencies to absolve the business owner of legal liability for business taxes and filing requirements. It also informs creditors that the business can no longer incur debt.
Each state has its own corporation or LLC unit, typically a division of the secretary of state, which provides the necessary forms.
Consult with a local attorney, as requirements vary by state.
Canceling All Permits and Licenses
This prevents others from using the seller’s permit or business name in a way that would hold you liable for taxes and penalties.
The cancellation process typically involves contacting the agencies responsible for issuing permits and licenses.
If you have used a fictional or assumed business name, you should also file an abandonment of the name.
Notifying Creditors, Customers, and Employees
All relevant parties should be informed of the business closure.
Employees should be notified at least two weeks before the last day, while customers should be given ample time to complete orders or projects.
If you cannot fulfill your customers’ needs before closing, return their deposits and payments for undelivered goods or unrendered services.
Paying Taxes and Other Debts
Complete all final payroll tax deposits, file final employment tax paperwork, and address any outstanding tax obligations, such as income taxes and sales taxes. An attorney can help you navigate this complex process.
Failure to properly dissolve a business can result in the business being considered active by the state, which entails continued compliance with state requirements, including filing annual reports and paying state taxes.
What Legal Issues Arise During Dissolution?
Several legal issues may arise during the dissolution process, including:
Settling Business Debts and Liabilities
If a business is dissolving due to unprofitability, its debts and liabilities must be addressed before closure. This involves notifying all creditors and ensuring debts are satisfied during the dissolution process.
Fulfilling or Canceling Remaining Contracts
Businesses may have ongoing contracts for goods or services with other entities. These contracts must be fulfilled or terminated in accordance with their terms.
Dividing Company Assets
The division of company assets can become a contentious issue, particularly if the business has been profitable over the years.
Business owners must decide whether to sell the business outright or dissolve it and distribute assets among the owners.
The business formation or shareholder agreements typically outline how assets should be divided upon dissolution. Legal disputes may arise if not, and a business dissolution lawyer can help represent an owner’s interests in dividing assets.
The process of dissolving a business and distributing its assets depends on the type of business originally formed.
Sole Proprietorship
For example, a sole proprietorship may dissolve when the owner decides to end the business, with assets used to pay debts and liabilities and any remaining assets returned to the sole proprietor.
Partnership
The business may dissolve in a partnership when partners agree to do so or when a partner dies. The partnership agreement outlines how assets are divided upon dissolution.
Corporations
Corporations typically dissolve upon a majority vote of shareholders authorizing the dissolution. The corporation formation documents and shareholder agreement determine how assets are divided upon dissolution.
Do I Need to Consult a Lawyer for My Business Dissolution?
If you are considering dissolving your business or have been ordered to do so, consult with an experienced business attorney.
A skilled and knowledgeable attorney can help determine the necessary steps for your business dissolution, assist with obtaining and filing required forms, and represent you in court if any legal issues arise during the process.
