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There’s more to dissolving a corporation than simply ceasing operations. You must formally complete the process by resolving business and financial affairs and filing articles of dissolution and tax documentation.
Failing to do so may lead to penalties and liabilities. In this post, we’ll walk you through the process step by step.
Why Dissolving a Corporation Is Worth It
Unforeseen events, financial difficulties, and failure to get off the ground, among other factors, may force you to make the difficult decision to dissolve a corporation. However tough it is, it’s better to dissolve the company than continue as an inactive corporation.
The reason being, even when you cease operations, a corporation remains a business entity in legal terms. This means there are state and federal legal requirements the company must fulfill unless it’s legally dissolved.
These include filing annual reports and paying business taxes. There may also be further requirements depending on the state in which the corporation was formed. Completing these actions means you remain in good standing with the state. But, if the corporation becomes inactive and doesn’t retain its good standing, there may be penalties.
Furthermore, if the state is forced to dissolve the corporation administratively, its owners may be responsible for any outstanding debts and other liabilities. There also may be penalties on unpaid taxes and interest.
If you must shut your doors, it’s better to legally dissolve the company than to let the aforementioned costs build up.
The Investment Needed to Dissolve a Corporation
Many factors may impact the time it takes to dissolve a corporation. These include the size of the corporation, the industry, and local regulations.
Filing articles of dissolution, i.e., formalizing the procedure with the state, may only take days to complete. But there are further necessary steps involved in dissolving a corporation. Aspects such as liquidating assets and filing all of the correct tax documents will likely take significantly longer.
On the financial side of things, there’s a small fee you must pay to the state to file articles of dissolution. The price depends on the state and ranges from $15 to $100+. Visit the state secretary or other relevant agency’s website for more information.
The other expense you may need to consider is legal fees. If there isn’t somebody with the legal know-how to take care of the dissolution of the corporation, then you may wish to seek outside help.
Similarly, if you’re concerned about compliance issues or other missteps in the process, you may decide to hire an attorney. But the trouble is attorneys usually charge over $100 per hour. One alternative is to make use of an online legal service that’s more affordable.
Rocket Lawyer, for instance, is a service that specializes in legal documentation. For $39.99 per month, you gain access to a range of legal document templates and professional attorneys to whom you can ask questions. You also get a free 30-minute consultation with an attorney on every new legal matter.
Rocket Lawyer also offers a standalone service for articles of dissolution. They’ll file all the required forms with the state on your behalf and tie up any loose ends, such as making sure associates are notified, and assets have been distributed.
6 Steps to Dissolve a Corporation
There’s an official route to dissolving a corporation. This includes taking care of certain financial and business matters, as well as filing articles of dissolution.
Make sure you adhere to proper protocols by examining the corporate bylaws, state regulations and following these steps:
#1 – Seek Approval from the Board of Directors and Shareholders
First, hold a meeting with the board of directors. The board must approve a resolution to dissolve the corporation before you can move onto the next step.
The board of directors may propose a plan of dissolution. This legal document sets out the agreements among directors and shareholders concerning the dissolution process and distribution of assets. It takes effect once the required permissions are obtained.
Next, the shareholders must vote on the dissolution resolution. A majority vote of approval means the initiative can go ahead. A majority comprises two-thirds of the shareholders in most states, but this varies from state to state.
When consent is acquired from directors and shareholders, you’re able to move forward with a voluntary dissolution. Note that you must adhere to state laws and corporate bylaws throughout the entire voting process.
Moreover, you should document the entire process in the corporate record book. And there must be a written agreement seeking dissolution signed by shareholders before you can file articles of dissolution.
#2 – File Articles of Dissolution
To officially dissolve the corporation, you must file articles of dissolution with the secretary of state or a similar office. The agency may be called the incorporation bureau, corporation agency, or corporation commission in some states.
Find and follow the guidelines for the procedure in your state. A simple Google search should take you to the correct department, e.g., searching “file articles of dissolution in Illinois.”
It’s also worth noting that if the corporation operates across multiple states, you must file paperwork in the other states, too. Otherwise, you may be responsible for annual reports, fees, and so on in each state.
Depending on the state, you may need to complete the relevant forms in person, online, or by mail. At this point, you must also submit the fee for filing articles of dissolution.
Sometimes known as the certificate of dissolution, the document usually only requires some basic information, including the name and address of the company, the date of the vote, the number of votes for and against, whether assets have been issued, and the date of execution.
#3 – Finalize Taxes
When you dissolve the corporation, failing to follow proper tax procedures could end in legal troubles and penalties. If there are unpaid tax debts, the government may seize assets against the payments, penalties, and interest. You may also be held legally responsible if you try to distribute assets to avoid paying final taxes. Be sure to follow protocol carefully.
There are a whole host of forms you need to fill out to wrap up taxation. So, bear in mind that legal advice or the help of an accountant could be particularly useful here.
First, you must notify the IRS by filing Form 966, which covers corporate dissolution and liquidation. Then you’ll need to file a final tax return for the year the business closes. Mark the box labeled Final Return on your tax return form.
Note that there are different tax return forms for C corporations and S corporations. You may also need to file the IRS form that covers the sale of business property.
Next up, you have to take care of the taxes that relate to employees. You must report and pay your portion and employees’ portions of the final federal employment taxes, including income tax, social security, unemployment, and medicare. There’s yet another form to report and pay taxes for contract workers.
Finally, you must cancel your employer identification number (EIN) and close your IRS business account. You can do this by sending a letter to the IRS that contains the business name, address, and EIN, along with the reason for closing the account, i.e., dissolution.
In some states, you must acquire a tax clearance certificate from the IRS before filing articles of dissolution. This certificate proves that all tax reports and payments have been finalized.
#4 – Notify Creditors
You must notify all creditors of the dissolution of the company and the time period they have in which to claim any outstanding debts. This also acts as a notification that you can’t incur any further debts from the creditors.
You can do this by sending creditors and relevant claimants a notice in the mail. Be sure to include the address to which creditors should send their claims and the information that must be included in the claim.
The time frame in which creditors have to make claims depends on the state but is usually around three years. If creditors fail to make a claim in that time, you may be able to bar their claim altogether. It’s a good idea to seek legal advice on such matters.
When you receive claims, the corporation can accept and pay claims or dispute them. If you dispute a claim, the creditor may file a lawsuit to recover the debts. But you may be able to reach an agreement with creditors in which you pay a lesser amount, for example, 80% of the debt. This would mean that you can avoid litigation which can be expensive and drawn-out.
If the corporation fails to pay its debts but rather distributes funds to shareholders, then the shareholders may be personally liable to creditors. So you must settle claims before distributing any assets to shareholders.
#5 – Liquidate and Distribute Assets
Any business assets that remain after claims with creditors are settled should be liquidated for distribution to shareholders.
This means selling assets, such as business equipment, real estate, and vehicles for cash. There may even be intangible assets you can liquidate, such as contracts and intellectual property.
There are several ways you can liquidate assets. For instance, you may find appropriate buyers through your existing network of contacts. Or you could put assets up for auction or hold a discount sale, etc.
You just need to make sure you can prove that the board has done everything it can to get the highest values for assets. So, be sure to keep good records of the liquidation process.
The way assets are to be distributed should be outlined in the corporate bylaws. Usually, the percentage of assets a shareholder gets corresponds to the amount of stock they own.
However, corporations sometimes have different stock classes. In this case, you’d need to look at the corporate bylaws to ensure each shareholder receives the proper distribution of the remaining assets.
#6 – Wrap Up Operations
If you haven’t done so already, you’ll need to wrap up any business affairs. At this point, you can’t conduct any business other than what’s necessary to wind the business down.
There are a number of loose ends you may need to tie up. This includes fulfilling any remaining contractual obligations, then ending contracts with clients. You may also need to collect any outstanding accounts receivables.
Also, you’ll need to take care of any commitments to employees, such as benefits, severance pay, and providing the appropriate paperwork.
You must notify vendors and customers that the business will be closed. You may wish to do this by publishing a notice in a local newspaper, for example.
Plus, you might need to terminate any permits or licenses for the state you formed the corporation in, as well as any other state you operated in.
Furthermore, you may need to withdraw from leases on business properties. And you’ll also need to ensure you balance the books so that you can close the corporate bank accounts and service accounts.
As you’ve seen, dissolving a corporation is a somewhat complex, multi-step process governed by various laws and regulations. Therefore, if anything remains unclear to you or you’re concerned you may make missteps in the process, then it’s a good idea to consult with a legal service next.
Once you dissolve a corporation voluntarily, it no longer exists as a legal entity. You’ve filed the correct documentation, distributed assets, and wound the business down. There’s nothing else to do regarding the dissolution.
If you want to get back into business, you’ll need to form a new corporation, which you can do with the help of online legal service providers. There are many steps involved in the process, including filing new articles of incorporation. And here is a guide to the best business checking accounts to consider as you launch your next venture.