You have decided to dissolve your business, but don’t know how to do so. The optimal way to dissolve a business is to go through the process of a voluntary dissolution. Voluntary corporate dissolution is the legal process of winding up a business.
Why Should I Dissolve My Business?
Dissolving your business ensures that your business is no longer responsible for filing annual reports, or to incur ongoing tax liabilities, late fees, filing fees, or penalties.
Moreover, until the business is dissolved, legal and financial claims can continue to be made against your company. And even worse, states can, and do, pierce the shield of corporate limited legal liability that business owners of corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), and limited partnerships (LPs) use to protect their personal assets from the obligations of the business.
In addition to the reasons outlined above, identity theft is a concern for businesses, just like people. Fraudsters have been known to search out abandoned businesses for illicit purposes. These unscrupulous individuals then fraudulently use your business’ name to purchase items and enter into agreements.
How Do I Dissolve My Business?
Look at Your Governing Documents
The first step in dissolving your business is to review the documents that established and govern your business. All business entities formed at the state level are required to have governing documents. These documents vary depending on the corporate form of the business. For example, LLCs have operating agreements, corporations have bylaws, LLPs and LPs have partnership agreements.
Amongst other things, these governing documents set forth how the voluntary dissolution process should take place.
Determine Your Domicile State
You will also need to determine what state is considered your business’ home state (also known as its domicile state). This is the state in which your business is registered with the Secretary of State as a “domestic” entity, not a “foreign” entity.
You can find out this information by reviewing your governing documents or conducting a business or entity search on the Secretary of State’s website in any state in which you operate.
Establishing your business’ home state is an essential part of the process because every state has different rules and procedures for dissolving a business. You must follow the procedures set forth by your business’ domicile state and your governing documents to ensure that the steps taken are in full compliance with all applicable procedures and laws.
Obtain Owner Approval
The next step in the process is to obtain formal approval to dissolve your business from the owners of the business. For LLCs, this would be from the members. For corporations, it would be the shareholders. For partnerships, it would be the partners.
The process for obtaining owner approval will depend upon your business’ governing documents. Often, this process will require a discussion and vote by the owners, which will be documented in a resolution.
Wind Up the Business
You will need to wind up your business. This wind up will involve notifying your employees, vendors, landlords, and insurers, paying out your employees for any wages and benefits owed, and settling any debts or lawsuits. You will also need to notify creditors of the process of filing claims with you. Any claims will need to be paid or otherwise resolved.
You also will need to file any tax returns required at the federal, state, and local levels and pay taxes owed. You will also need to report payments to contract workers that reach the reportable thresholds to the applicable tax authorities.
Once these steps have been completed, you will need to liquidate or distribute any remaining assets to the owners, or in the case of a non-profit corporation, allocate assets as stipulated in the corporation’s Articles of Incorporation and Bylaws.
Business Dissolution Filing
After the business owners have approved the dissolution, the next step will depend upon your business’ home state. All states require that you file a Certificate or Articles of Dissolution with the Secretary of State in your business’ home state.
However, some states require that you notify your creditors before filing the Certificate of Dissolution, and other states require that you notify your creditors after filing the Certificate of Dissolution.
Further, while there are exceptions, most states require a tax clearance, which documents that all taxes have been paid, before filing the Certificate of Dissolution. Once the Certificate of Dissolution is filed, your business no longer legally exists and therefore cannot legally conduct business from that point forward.
Business Withdrawal
If you are registered to do business in multiple states, you will also need to legally cancel your business’ authority to conduct business in all foreign states of registration. This process is called a “withdrawal” or “cancellation.” Every state has its own forms and processes for withdrawing a business registration.
Record Retention
After you dissolve your business entity, it is imperative to retain certain business records. You want to ensure that you have any relevant documents if you are audited or need to defend yourself from any legal claims. Generally, records should be kept until after the relevant statute of limitations period expires.
The period of the statute of limitations is dictated by the type of business record and the states in which you conduct business. Most statutes of limitations are between three and six years, but there are some outliers that are longer.
For example, the IRS recommends keeping employment tax records for four years. Illinois, however, has a ten year statute of limitations for certain civil claims involving leases and contracts.
Conclusion
When you close your business, it is important to take the time to do it correctly. Every state and business type has different procedures and rules. You must follow the process required by your business’ home state and governing documents. You also must retain all relevant business records during statute of limitations periods.
Mistakes can be costly. Making any missteps could lead to lawsuits, fraud, and/or penalties and fines. It’s always best to do this with the help of someone who has expertise in this area.
Should you need help navigating this process, please reach out to consult with an expert.
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