There are many reasons why you may choose to, or be required to, close your business. These reasons may include retirement, the sale of key business assets, a merger or consolidation.
They also may include health or financial issues or disputes between the owners. Whatever the reason, the process of closing your business can be a stressful and daunting process.
Types of Corporate Dissolutions: Voluntary, Administrative, and Judicial
There are three ways that your business can end: voluntary dissolution, administrative dissolution, and judicial dissolution.
Voluntary Dissolution
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. 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.
Administrative Dissolution
Businesses can also be dissolved by the state in what is known as an “administrative” or “involuntary” dissolution. Administrative dissolutions occur when a business fails to comply with certain statutory business and filing requirements. These requirements include filing periodic reports with the Secretary of State, filing income tax returns, paying taxes due, and maintaining a statutory registered agent.
Sometimes, business owners choose to close their business by abandoning the business – that is, deliberately (or consciously), failing to comply with statutory requirements. Abandonment is not the recommended method of closing a business.
The danger of this approach is that business and legal obligations don’t end after you walk away. Until the business is dissolved, legal and financial claims can 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.
Additionally, identity theft is a concern for businesses, just like people. Fraudsters have been known to search out and use abandoned businesses for illicit purposes. These unscrupulous people then fraudulently use your business’ name to purchase items and enter into agreements.
Judicial Dissolution
Judicial dissolution is when the courts order the dissolution of a business. It is the rarest type of dissolution. It usually occurs because of irreparable disputes between the owners, or bankruptcy.
When the court orders a judicial dissolution, the business must be closed and cannot take any actions other than winding down and liquidating. In the case of bankruptcy, the court will supervise the sale or liquidation of the company.
Steps for a Voluntary Corporate Dissolution
Governing Documents
The first step in dissolving your business is to look at the documents that established and control 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.
These governing documents set out, among other things, how the voluntary dissolution process will take place.
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 where 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.
You will need to know your business’ home state because every state has different rules and procedures on how to dissolve a business. You need to make sure that you are following the procedures required by your business’ domicile state and by your governing documents.
Owner Approval
The next step 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 this approval will depend upon your business’ governing documents.
Wind Up
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. 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.
Corporate Dissolution Overview
Whatever the reason for closing your business, it is important to take the time to do it correctly. Every state and business has different procedures and rules. You must follow the process required by your business’ home state and governing documents.
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 stressful process, please reach out to consult with an expert.
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