Dissolution - Dissolving Your Business - There are many reasons to
dissolve a corporation. There are six primary steps involved when dissolving a
company. They are:
• Corporate action
• Filing articles of dissolution with the state
• Filing all necessary federal, state, and local tax forms
• Statutory notification to creditors
• Settling creditors' claims
• Distribution of remaining business assets
Corporate Action - The owners of the company must approve the dissolution of
the business. With corporations, the shareholders must approve this action.
With LLCs, the members must grant approval. For small businesses, the
shareholders or members are often involved in the day-to-day operations of the
business, and therefore know the circumstances leading to the dissolution.
The bylaws of a corporation and the operating agreement of an LLC typically
outline the process for dissolution in terms of necessary approvals. To comply
with the formalities of a corporation, the board of directors should draft and
approve the resolution to dissolve the company. The shareholders should then
vote on that resolution once approved by the directors. Both actions should be
documented and placed in the corporate record book. While LLCs are not
subject to the same formalities, formally documenting the decision to dissolve
the LLC and the members' approval is recommended.
Filing the Certificate of Dissolution with the State - After the shareholders or
members have voted to dissolve the corporation or LLC, the appropriate
paperwork must be filed with the state in which the business was formed. If the
business has qualified to transact business in other states, the appropriate
paperwork must also be filed in those states. The process for filing the
certificate of dissolution varies by state. Some states require the documents be
filed before notifying creditors and resolving claims. Other states require the
documents be filed after that process. To learn more about your state's
requirements, contact your Secretary of State's office. Certain states require tax
clearance for the company before the certificate of dissolution can be
filed. In these cases, any back-taxes owed by the corporation or LLC must first
be paid.
File All Necessary Federal, State, and Local Tax Forms - Because you are
ceasing operations, your tax obligations do not immediately cease. You must
formalize the closing of the business with the IRS as well as your state and local
taxing agencies. The IRS web site (www.irs.gov) includes a checklist for closing
a business, which lists the types of forms that may be required, and also
includes a link to additional information on state and local requirements. Also,
do not overlook payroll reporting obligations if you have employees. It is
recommended that you consult with an accountant or tax advisor on the
requirements for your particular business.
Notification to Creditors - You must notify by mail all of your company's
creditors of the dissolution. The notice given should include the following
information:
• That your corporation or LLC has been dissolved or has filed the statement of
intent to dissolve.
• The mailing address to which creditors must send their claim(s).
• A list of the information that should be included in the claim.
• The deadline for submitting claims (this is often 120 days from the date of the
notice).
• A statement that claims will be barred if not received by the deadline.
It is possible that your state may allow for claims from creditors that are not
known to the company at the time of dissolution. In these states, notice in the
local paper of your company's dissolution may be required. It is best to seek the
advice of an attorney regarding what your state mandates.
Settling Creditors' Claims - Claims submitted to the company by creditors
can be accepted or rejected by your company. Accepted claims must either be
paid or arrangements that are satisfactory to creditor must be made for
repayment. For example, it is possible that a creditor may agree to settle the
claim for a certain percentage of the original claim amount, such as 80%.
With rejected claims, you must advise creditors in writing that your company
rejects their claims. It is advisable to seek the services of an attorney to assist in
this process. Your attorney can advise you about the state's statutes governing
actions on rejected claims.
Distribution of Remaining Assets - After payment of creditors' claims, the
remaining assets may be distributed to the owners of the company. Assets are
distributed in proportion to the share of ownership. For example, if you own
80% of the business and your brother owns 20%, you would receive 80% of the
remaining assets. Distributions must be reported to the IRS. If you have a
corporation that has multiple classes of stock, such as common and preferred
shares, the corporate bylaws typically outline the procedure for distributing
assets to these shareholders. For additional information on the distribution of
assets, it is best to contact an accountant or tax advisor.
dissolve a corporation. There are six primary steps involved when dissolving a
company. They are:
• Corporate action
• Filing articles of dissolution with the state
• Filing all necessary federal, state, and local tax forms
• Statutory notification to creditors
• Settling creditors' claims
• Distribution of remaining business assets
Corporate Action - The owners of the company must approve the dissolution of
the business. With corporations, the shareholders must approve this action.
With LLCs, the members must grant approval. For small businesses, the
shareholders or members are often involved in the day-to-day operations of the
business, and therefore know the circumstances leading to the dissolution.
The bylaws of a corporation and the operating agreement of an LLC typically
outline the process for dissolution in terms of necessary approvals. To comply
with the formalities of a corporation, the board of directors should draft and
approve the resolution to dissolve the company. The shareholders should then
vote on that resolution once approved by the directors. Both actions should be
documented and placed in the corporate record book. While LLCs are not
subject to the same formalities, formally documenting the decision to dissolve
the LLC and the members' approval is recommended.
Filing the Certificate of Dissolution with the State - After the shareholders or
members have voted to dissolve the corporation or LLC, the appropriate
paperwork must be filed with the state in which the business was formed. If the
business has qualified to transact business in other states, the appropriate
paperwork must also be filed in those states. The process for filing the
certificate of dissolution varies by state. Some states require the documents be
filed before notifying creditors and resolving claims. Other states require the
documents be filed after that process. To learn more about your state's
requirements, contact your Secretary of State's office. Certain states require tax
clearance for the company before the certificate of dissolution can be
filed. In these cases, any back-taxes owed by the corporation or LLC must first
be paid.
File All Necessary Federal, State, and Local Tax Forms - Because you are
ceasing operations, your tax obligations do not immediately cease. You must
formalize the closing of the business with the IRS as well as your state and local
taxing agencies. The IRS web site (www.irs.gov) includes a checklist for closing
a business, which lists the types of forms that may be required, and also
includes a link to additional information on state and local requirements. Also,
do not overlook payroll reporting obligations if you have employees. It is
recommended that you consult with an accountant or tax advisor on the
requirements for your particular business.
Notification to Creditors - You must notify by mail all of your company's
creditors of the dissolution. The notice given should include the following
information:
• That your corporation or LLC has been dissolved or has filed the statement of
intent to dissolve.
• The mailing address to which creditors must send their claim(s).
• A list of the information that should be included in the claim.
• The deadline for submitting claims (this is often 120 days from the date of the
notice).
• A statement that claims will be barred if not received by the deadline.
It is possible that your state may allow for claims from creditors that are not
known to the company at the time of dissolution. In these states, notice in the
local paper of your company's dissolution may be required. It is best to seek the
advice of an attorney regarding what your state mandates.
Settling Creditors' Claims - Claims submitted to the company by creditors
can be accepted or rejected by your company. Accepted claims must either be
paid or arrangements that are satisfactory to creditor must be made for
repayment. For example, it is possible that a creditor may agree to settle the
claim for a certain percentage of the original claim amount, such as 80%.
With rejected claims, you must advise creditors in writing that your company
rejects their claims. It is advisable to seek the services of an attorney to assist in
this process. Your attorney can advise you about the state's statutes governing
actions on rejected claims.
Distribution of Remaining Assets - After payment of creditors' claims, the
remaining assets may be distributed to the owners of the company. Assets are
distributed in proportion to the share of ownership. For example, if you own
80% of the business and your brother owns 20%, you would receive 80% of the
remaining assets. Distributions must be reported to the IRS. If you have a
corporation that has multiple classes of stock, such as common and preferred
shares, the corporate bylaws typically outline the procedure for distributing
assets to these shareholders. For additional information on the distribution of
assets, it is best to contact an accountant or tax advisor.
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