There are quite a few different reasons why entrepreneurs choose to dissolve their corporations. While we can’t possibly dig into the details of all of them, we can certainly give you an overview of the most common reasons behind corporate dissolutions.
The first step to dissolving a corporation is to ensure everyone is on board with closing the business, which calls for a vote to dissolve. In a corporation, this vote is two-fold.
First, a board meeting should be held so the board of directors can discuss and vote on the initiative to dissolve. Then, once the board members have agreed to dissolve, a similar meeting should occur for the shareholders. Unlike an LLC, which is both directed and owned by its members, the corporation has both the directors and shareholders — both parties should have a role in the decision to dissolve.
Usually, a simple majority of the shareholders must vote for dissolution in order for the initiative to pass. The exact number of votes required in favor of dissolution will vary from one state to another, but in some states, it takes the agreement of at least two-thirds of the shareholders.
Both state law and the corporation’s bylaws govern exactly how this voting process should occur. The corporation should consult and abide by these guidelines throughout the entire process.
Before dissolving, each corporation needs to fulfill its financial obligations, taxes included.
To that end, some states require all dissolving businesses to obtain a certificate of tax clearance from the IRS and the state Department of Revenue. This document proves that you have fulfilled all of your tax obligations prior to dissolving.
If your state requires these certificates, you’ll need to get them prior to filing the Articles of Dissolution. Getting the tax clearance isn’t always a timely process, so you should plan accordingly in case it takes longer than expected.
The Articles of Dissolution (sometimes called the Certificate of Dissolution) is the document that officially ends your business activities. You can usually find the form with your Secretary of State’s office, and you can typically file online or by mail, rather than filing the forms in person.
The form requests information about your business, such as who voted to dissolve, a description of the voting results, and more.
The certificate is typically all you’ll need for this step, but a few states require you to submit a notice of your intent to dissolve first, and as we mentioned previously, if your state also requires a certificate of tax clearance, be sure to include it.
If there are creditors or other claimants (excluding your shareholders) who are owed money, you also need to notify them. Notifying them gives them an opportunity to stake their claim, and it also lets them know that you can no longer incur debts.
Your letter to your creditors should include what period the claimants have to make their claims. If your creditors do not make their claim during that time period, you are allowed to bar their claims.
In most states, this period lasts for around three years, although you’ll want to check with your state to see what the exact timeframe looks like.
Before you officially close up shop, you need to end all your affairs. For example, you’ll need to finish up contracts or withdraw from them, and also take care of any commitments you might still have to your employees. If you have a lease for your business location, you may need to withdraw from it as well, if it hasn’t ended yet.
Once your creditors are paid, you can liquidate your business assets. This includes property, equipment, company cars, and other similar assets. Once you’ve liquidated all of your assets and paid all your financial obligations, you can distribute the remaining assets to your shareholders.
All steps of your wind-up should be completed in accordance with your bylaws and state regulations.
Some business licenses do not automatically expire, so you’ll need to cancel them yourself. If you don’t, the licensing board might automatically charge you renewal fees, which can rack up pretty quickly.
Even if you don’t have to cancel your licenses, you may just want to notify the licensing board that you’re no longer operating. That way, they can remove you from any mailing lists, and they’ll have a more accurate idea of what businesses remain operational in the industry.
For the majority of this guide, we’ve covered how to dissolve a domestic corporation — or one that was incorporated in-state — but it’s not uncommon at all for a corporation to operate in multiple states.
If you received authority to operate your corporation in additional states by getting a foreign registration, you do need to cancel it. You can do so by filing an application for certificate of withdrawal. You need to complete this step for each additional state where you operated your corporation.
By notifying them, you will no longer be subject to any out-of-state fees, and those states also won’t expect you to keep up with ongoing corporate maintenance requirements.
The majority of this article has addressed the process for voluntary dissolution, or in other words, one that you and your members choose to complete.
However, it is possible for a corporation to be administratively dissolved, or dissolved by the state by force. This can occur when a business falls out of compliance, usually for failing to file annual reports, neglecting fees or penalties, and/or refusing to honor debts.
Reinstating a corporation that has been administratively dissolved is possible, but the process can be a hassle, and it usually has some rather steep fees attached. Reinstatement varies from one state to another ― usually it involves correcting the problem that caused the dissolution, submitting an application for reinstatement, and paying some sort of penalty.
As a general rule, it’s far easier to stay up-to-date on your compliance requirements to avoid administrative dissolution than it is to reinstate a dissolved business.
Completing the corporate dissolution process is not the end of the line for your business. You will need to first wait for your state to process your dissolution paperwork, which could take just a few days in some states and a matter of weeks in others.
Even after the state accepts and processes your dissolution documents, there is still another phase of this process remaining: you need to give your customers, partners, vendors, and other potential creditors a chance to settle any remaining contracts, debts, or lawsuits with your business.
The period can vary based on your state, industry, and personal preferences. However, three years is a common length of time for this part of the process. After this period, no one can ever sue your corporation again. It will be considered permanently canceled, and no lawsuits are permitted once those years are up.
Even if you’re 100% certain that you’ll never sell another product or service again, there are other aspects to consider. First off, are all of your directors, officers, and shareholders in agreement that it’s time to dissolve the corporation? If not, are enough of them on board to fulfill the voting requirement as outlined in your corporate bylaws?
Unfortunately, you don’t have many options, and the options you do have aren’t great. If it’s a close vote, one option is to try and convince your shareholders to replace a director to tilt the scales. Another option is to seek a buyout yourself — if you can’t convince them to dissolve the corporation, perhaps the next-best choice is to simply depart from the company. Finally, you can always agree to work with your co-owners to improve the corporation’s business prospects, although this isn’t exactly easy or enjoyable when everyone knows you want out.
If you want to continue operating your business but don’t think the corporation is the right entity type for you, converting to a different entity might be a better plan. The easiest way to convert your LLC into a corporation is to perform a statutory conversion with the Secretary of State’s office. However, not all states offer statutory conversions. If yours doesn’t, you’ll need to use a statutory merger or non-statutory conversion, both of which are considerably more complex. If you have questions about these options, contact your Secretary of State or a qualified business attorney.
If the dissolution process sounds too stressful or difficult, there are other options. Namely, if you want to make sure your corporation is appropriately dissolved, you can hire a business services provider to handle the process for you.
While this does cost some money, these companies can dissolve your corporation for much less money than a lawyer would charge you to do the same thing.
If you’re looking for a company to dissolve your corporation for you, we strongly recommend checking out the top incorporation services, which can both incorporate a business and dissolve it. That said, while there is definitely some overlap between the best incorporation services and the top dissolution services, our preferred choices are different. See this comparison guide for more info.
The dissolution process can be rather complicated, so it may be tempting to just stop conducting business and hope for the best. Technically, you can informally close up shop by simply stopping, but for many obvious reasons, this is a terrible idea.
Here’s why: a corporation is perpetual, and it doesn’t end until you formally dissolve it with the state unless you specified an “end date” when you incorporated it. If you don’t file to end it by filing the Articles of Dissolution, your business will still exist. Without this crucial filing, your corporation will continue to incur fees for compliance requirements like annual reports and licenses, while unpaid fees and debts can set you up for later liability and even lawsuits.
It’s a much safer idea to take the time to formally dissolve your business, rather than simply throwing your hands up and hoping for the best.
Dissolving a corporation requires time and meticulous effort, but it pays to dissolve your business correctly because it protects you from perpetual liability. Failing to dissolve your corporation with the state can lead to renewal fees and late filing penalties piling up because the state doesn’t know you’re not still in business. It can also cause some serious headaches with your creditors.
If you have any further questions beyond those we’ve covered in this article, you should probably consult with a business attorney to make sure you’re completing each step of the dissolution process correctly.
In some states, yes. Depending on your state, you might need to obtain a tax clearance form from the state’s taxation agency. In others, you may need to have the state file a Consent of Dissolution form, while some require a verification from the tax board certifying that you have fulfilled all taxation obligations. To verify your exact requirements, contact your state’s taxation agency.
This all depends on which state your corporation is based in. Some states can process dissolutions in a matter of days, while others can take several weeks. Similarly, some states offer expedited services, while others don’t. In addition, there are states that require tax clearances or other pre-dissolution documents, which can add to your total turnaround time.
It’s quite common to see people discussing a process known as winding down in regards to corporate dissolutions. But what does this actually mean? Winding down refers to wrapping up a few practical odds and ends before dissolving the business. These steps include things like informing any potential creditors that you are shutting down your corporation, selling your remaining inventory and business equipment, liquidating the corporation’s assets, settling debts, and more. You must properly wind down your corporation before dissolving it.
This is a common misconception, and the true answer is no. If you have expanded your corporation into additional states through the foreign qualification process, you will need to withdraw the corporation from each of those states individually. If you don’t, you will face a similar series of potential fines and penalties as you would for failing to dissolve the corporation from its home state.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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