Ask About Corporate Dissolutions
I've got a corporation I no longer need. How do I make it go away?
Thank you for your question.
It's important to formally dissolve and terminate your corporation. This goes for an LLC as well. Just walking away from the business can have serious consequences, including:
- liability for fees, penalties, and fines
- increased exposure to business identity theft, which can prove extremely costly
- possible loss of limited liability protection, exposing your personal assets to business creditors.
Here are the things you need to do to wind down your corporation or limited liability company; we'll call them the "Dissolution Half-Dozen":
Take corporate action
The owners of the company (corporate shareholders, LLC members) must approve the dissolution of the business. The bylaws of a corporation and the operating agreement of an LLC typically outline the process for dissolution in terms of necessary approvals.
To comply with the formalities of a corporation, the board of directors should draft and approve the resolution to dissolve the company. The shareholders should then vote on that resolution once approved by the directors. Both actions should be documented and placed in the corporate record book. While LLCs are not subject to the same formalities, formally documenting the decision to dissolve the LLC and the members' approval is recommended.
File articles of dissolution with the state
After the shareholders or members have voted to dissolve the corporation or LLC, the appropriate paperwork must be filed with the state in which the business was formed. If the business has qualified to transact business in other states, the appropriate paperwork must also be filed in those states.
The process for filing the certificate of dissolution varies by state. Some states require the documents be filed before notifying creditors and resolving claims. Other states require the documents be filed after that process. To learn more about your state's requirements, contact your Secretary of State's office. Certain states require tax clearance for the company before the certificate of dissolution can be filed. In these cases, any back-taxes owed by the corporation or LLC must first be paid.
Once the articles of dissolution are filed, the regular business of the corporation or LLC must cease. The entity still exists—but only for the purpose of "winding up" its affairs and distributing assets.
File all necessary federal, state, and local final tax forms
You must file final returns in all jurisdictions for your tax obligations. Also, do not overlook payroll-reporting obligations if you have employees.
Notify your creditors
You must notify all of your company's creditors about the dissolution by mail. The notice given should include the following information:
- that your corporation or LLC has been dissolved or has filed the statement of intent to dissolve
- the mailing address to which creditors must send their claim(s)
- a list of the information that should be included in the claim
- the deadline for submitting claims (often 120 days from the date of the notice)
- a statement that claims will be barred if not received by the deadline
It is possible that your state may allow for claims from creditors that are not known to the company at the time of dissolution. In these states, notice in the local paper of your company's dissolution may be required. It is best to seek the advice of an attorney regarding what your state mandates.
Settle creditors' claims
Claims submitted to the company by creditors can be accepted or rejected by your company. Accepted claims must either be paid or arrangements satisfactory to creditor must be made for repayment. For example, it is possible that a creditor may agree to settle the claim for a certain percentage of the original claim amount, such as 80 percent. With rejected claims, you must advise creditors in writing that your company rejects their claims. It is advisable to seek the services of an attorney to assist in this process. Your attorney can advise you about the state's statutes governing actions on rejected claims. Also, ask your attorney to assess your contingent liabilities going forward. Perhaps you may have some ongoing exposure (such as product liability, for example), which you can protect yourself from via insurance.
Distribute remaining business assets
After payment of creditors' claims, the remaining assets are distributed to the owners of the company. Assets are distributed in proportion to the share of ownership or as provided in the operating agreement of an LLC. For example, if you own 80 percent of the business and your brother owns 20 percent, you would receive 80 percent of the remaining assets.
Distributions must be reported to the IRS. If you have a corporation that has multiple classes of stock, such as common and preferred shares, the corporate bylaws typically outline the procedure for distributing assets to these shareholders. For additional information on the distribution of assets, it is best to contact an accountant or tax adviser.
If your company is ceasing operations, or already is no longer in business, BizFilings can help prepare and file the articles of dissolution with the state for your business. The cost for this service varies by state.