800-981-7183

Small Business News
Small Business News

Filed under Running a Business.

Take Action to Properly Dissolve Your Corporation or LLC

By Catherine Gordon, JD | June 27, 2016

As the year ends, you may have reached the conclusion that your business didn’t meet your expectations, financially or personally. Businesses dissolve for a variety of reasons, and not all of them are necessarily negative. Letting go of a business that doesn’t fulfill the goals you set for becoming a small business entrepreneur can allow you to start a new business with a clean slate—provided that you properly dissolve the business ceasing operations.

If you are wrapping up your operations, must you go through the process or dissolving your corporation or limited liability company (LLC) with the state? The answer is an unqualified “yes.”

Dissolution is a legal process that terminates a business’s existence. If a business is not properly dissolved, it continues to exist as a legal entity under state law. This means that it will be remain subject to corporation or LLC filing requirements, such as annual reports and franchise taxes.  Failing to meet these continuing obligations can result in additional fines, taxes, penalties and potential liability, which may extend to you personally.

Warning

Involuntary or administrative dissolution of an entity can also occur for a variety of reasons, among the most common being the failure to file an annual report or properly maintain a registered agent for service of process. Outsourcing these tasks to a company that specializes in entity compliance, such as BizFilings, ensures that your company is not forced to dissolve due to an inadvertent oversight, as well as avoiding the cost and hassle of attempting reinstatement.

Each state has its own laws governing dissolution, but there are general guidelines encompassed by most state statutes that apply to both corporations and LLCs. The proper filings are required for each state in which your business will cease to exist. This includes your “home state”—your state of incorporation or organization—as well as any “foreign” states in which you are qualified to do business.

Dissolution is a multi-step process involving a flurry of paperwork, often including sometimes interdependent filings of dissolution documents with the state, as well as federal, state and local tax forms, and finally notifying creditors and settling claims.

Owner Approval Is the First Step

A corporate or LLC dissolution generally requires that the shareholders or members approve the dissolution. Corporate bylaws or the LLC’s operating agreement routinely spell out the process for dissolving, including shareholder and member approvals needed, in accordance with applicable statutes.

Tip

For corporations, the board of directors should draft and approve the resolution to dissolve. Then, if necessary, shareholders vote on the resolution, and both actions are documented in the corporation’s record book.

LLCs aren’t required to follow the same procedures as corporations, but best practices dictate that the decision to dissolve and the members' approval be documented.

Dissolution Documents Must Be Properly Filed

Once the dissolution has been approved by the entity, a Certificate of Dissolution (also called Articles of Dissolution or Certificate or Articles of Termination) must be filed with the company’s home state. The appropriate filings must also be made in any other states where your corporation or LLC is qualified to transact business.

The process for properly filing dissolution documents varies by state and may require the filing of a statement of intent to dissolve, a tax clearance, and notification to, and settlement of, creditors’ claims.

Tax clearance often required to effect dissolution. Many states require a dissolving entity to obtain a tax clearance as proof that no back-taxes are owed before filing dissolution papers.

Warning

The rules regarding obtaining tax clearances can vary widely from state-to-state. In some states, a tax clearance may take a lengthy time to obtain, slowing down the entire dissolution process. Check with the secretary of state for the tax clearance rules you need to comply with when dissolving a corporation or LLC.

State rules vary regarding creditors. State law requires that a company that is dissolved or intends to dissolve notify its creditors of its dissolution and provide the information needed by creditors in order to submit their claims. The information that must be provided includes the deadline for submitting claims, which is usually 120 days from the date of notice. Some states require dissolving entities to publish notices of dissolution to notify creditors not known to the corporation and allow them to submit claims.

Work Smart

State statutes regarding notifying creditors of a company’s dissolution and settling creditors’ claims are tricky on two fronts. First, creditors’ claims may be rejected by your business, or accepted and paid in full, or subject to arrangements made with the creditors. You must comply with state statutes when notifying creditors as well as when settling claims, therefore you should consult your attorney so that you don’t run afoul of state laws.

In addition, some states require that you notify creditors and resolve claims before the dissolution documents are filed with the state. Conversely, some states require the dissolution documents be filed prior to notifying the business’s creditors and settling claims. Check the requirements with the appropriate secretary of state so that the dissolution process is not halted.

Tax filings are required for dissolution. When you dissolve your business, you must be sure to file the required federal, state and local tax returns and documents. These filings are frequently time-sensitive.

Tip

Consult your accountant or tax advisor for the tax requirements you must fulfill and the deadlines for doing so, including how to report the distribution of assets to the Internal Revenue Service (IRS).

Remember to Cancel Business Licenses and Permits

An often overlooked piece of the dissolution process is the cancellation of licenses and permits held by the business. Because licenses and permits are issued at the federal level as well as multiple state and local government levels, numerous cancellations may be required depending on your business’s industry and where you transact business.

Work Smart

Whatever the reasons for dissolving your company, there’s little doubt that you will have multiple responsibilities regarding the end of your business operations. You may find it beneficial to outsource the preparation and filing of the dissolution documents with the state to an entity compliance company, such as BizFilings. Doing so takes one major task off your list of dissolution duties and ensures that it’s done correctly and in a timely fashion.

blog comments powered by Disqus