Your business has had a great run (or maybe a so-so run, or just a "good" run), but the time has come to wind it down. The legal step of ending your company’s existence is known as “dissolution.” There are two types of dissolution:
- Voluntary dissolution
- Involuntary dissolution (e.g., if your company fails to pay taxes, or by court order – for reasons such as corporate misconduct by majority shareholders)
Hopefully you fall into the first category, but in any case, there are six legal steps to dissolving a business ...
1. Approving the Dissolution
The winding down of a company requires formal approval (in writing) by the company’s owners of the decision to dissolve. If you are structured as a corporation, ownership will consist of your company’s shareholders; if an LLC, it will consist of the LLC’s “members.”
When you (or a lawyer) drafted your corporation’s bylaws (or LLC’s operating agreement), you would have likely drafted procedures specific to this circumstance at that time. Some bylaws and operating agreements contain dissolution provisions requiring the approval of a supermajority (i.e., 67%) of the company’s owners to effect a dissolution.
If your company is structured so as to maintain a board of directors, you should consider having the board draft and approve a formal resolution to dissolve. The company’s shareholders (or members) would then vote on the director-approved resolution. Be sure to obtain signatures by the stakeholders, in writing.
2. Filing a Certificate of Dissolution and Tax Forms
Your company must file voluntary dissolution paperwork with the Secretary of State for your state after the required proportion of shareholders or members have voted for the dissolution. Note that if your company became certified to transact business in other states during its existence, you must file notices of dissolution in those states as well.
The process for filing a certificate of dissolution varies somewhat by jurisdiction. Some states require filing the certificate before notifying creditors and resolving outstanding claims (see further discussion below); others require filing after taking those steps. Similarly, some states require that any back taxes owed by the corporation or LLC must first be paid before filing the certificate of dissolution.
The bad news is that your company’s tax obligations do not immediately cease even though the company itself is ceasing operations. You must notify the IRS, as well as the state taxing agency and any local taxing agency, of the dissolution. The form that the IRS requires you file with it is called a Form 966 (Corporate Dissolution or Liquidation).
3. Notifying Employees
Don’t forget to notify your employees! You will have to issue final wage and withholding information to employees, and if applicable, file final tip income and allocated tips information returns. Be sure to consult your accountant or tax adviser concerning state-specific final wage payment obligations.
4. Notifying Creditors and Settling Their Claims
In some jurisdictions, you have to notify creditors of the company (those who would claim that the company owes them money) of the impending dissolution of your company before filing a notice of dissolution with the Secretary of State. You must typically notify your creditors of:
- The fact of the dissolution
- The mailing address for submitting claims
- An indication of the information required to submit a claim
- The claim submission deadline (which varies by state)
- The fact that their claim will not be considered if submitted after the deadline
What if there are creditors whose identities are not immediately known to you? Each state typically provides for this circumstance, often requiring that you publish a notice to a local paper, which notifies potential creditors of your company’s dissolution. An example of such a public notice, published in Minnesota, is available here. When in doubt, consult with counsel concerning the obligations mandated in your jurisdiction. Ohio, for example, requires that dissolving companies post a notice of dissolution to creditors on the dissolving company’s website.
Your company can accept or reject creditor claims submitted to it. Accepted claims must be paid, or else arrangements made for repayment. Negotiation can be involved here – some creditors might agree with your company to settle the subject claim for less than 100% of the original amount. For rejected claims, you must advise the creditor in writing of your company’s rejection of the claim. Consult with counsel if you have any questions about whether to reject a specific creditor’s claim.
5. Distributing Remaining Assets
After paying claims, the company’s remaining assets may be distributed to company owners. Assets should be distributed proportionate to each owner’s share of the company. For example, if you own 70% of “Mama’s and Papa’s Fritas,” (“MAPF”) and your cousin owns 30% of MAPF, you’ll receive 70% of MAPF’s remaining assets upon dissolution. MAPF has to report these distributions to the IRS.
Recall that if your company is structured as a corporation, it may have multiple stock classes (such as “preferred” and “common” shares). For example, you may have created different classes of stock to allocate different voting rights to each category of shareholder (“Class A,” “Class B,” etc.). The procedure for distributing assets to shareholders in each shareholder class would typically be outlined in the company’s bylaws. For further information on distribution and your ongoing contingent liabilities, contact a tax adviser, accountant or attorney.
The above information is neither legal advice nor a substitute for reference to applicable state and federal law, and instead provides general information.