The term business dissolution refers to the end of the life of a company. Business dissolution is a formal closure of a business with the state in which the business is registered. It is important to remember that there are several steps to take before a business may be legally dissolved.
Thus, you cannot simply stop conducting business, or claim that your business is closed. In the instance of a small business, if they have formed a corporation or an LLC, they must file articles of dissolution with their state in order to completely terminate their business. Articles of dissolution notify the local Secretary of State that a business is formally closed.
Business dissolution occurs for several reasons, some of which include:
- Financial losses;
- No time or will to keep the business going;
- Retirement; and/or
- Change of career.
The state may force the corporation to dissolve if their taxes were not paid. This is referred to as administrative dissolution. Administrative dissolution can also occur when an annual report was not submitted.
What Can I Do to Prepare for a Business Dissolution? How Do I Dissolve a Business?
It is important to dissolve your business properly in order to avoid issues down the line. You should protect yourself, as well as your credit and your community reputation. Some ways you might prepare for a business dissolution include:
- Notifying the IRS as well as all other appropriate state and local tax agencies;
- Cancelling all business licenses;
- Notifying creditors, insurers, lenders, vendors, service providers, and suppliers;
- Notifying your landlord if you are leasing or renting your company’s premises;
- Collecting any debts that are owed to your business; and
- Selling company assets, such as furniture, equipment, and property.
The general process for dissolving a business begins with making these preparations. A business dissolution attorney can assist the process by ensuring you have taken all necessary steps before proceeding with business dissolution, as these may vary from state to state.
What Is the Proper Way to Dissolve a Business?
The general process for dissolving a business in a legal way includes:
- Voting to Close the Business: If a business has been operated as a corporation, LLC, or partnership, all business associates must be in agreement regarding dissolution. This will likely be governed by either organizational documents, or state business statutes. The decision should be recorded in the meeting minutes, or through a written consent form;
- Dissolving the Business With State and Local Government: This was touched on in the previous section. To properly dissolve a business, state and local government agencies will need to be notified. This is so the business owner will cease to be legally liable for business taxes and filing requirements. Additionally, this act notifies creditors that the business cannot incur any further debt. Each state has its own corporations or LLC unit that will likely have all necessary forms. Such a unit is most likely going to be a division of the secretary of state. However, as requirements can vary by state, it is important to consult with a local attorney;
- Cancelling All Permits and Licenses: Again, this was previously mentioned in regards to dissolution preparation. This is so no one else can use the seller’s permit or business name in such a way that you will be held liable for taxes and penalties when you no longer own the business. Cancelling permits and licenses can generally be accomplished by contacting the agencies responsible for issuing those permits and licenses. If you have utilized a fictional or assumed business name, you should also file an abandonment of the name;
- Notifying Creditors, Customers, and Employees: In addition to the aforementioned, you should notify all necessary parties of your business closure. Employees should be aware of what to expect. They should be informed of the closure at least two weeks prior to the last day. Customers should also be informed with plenty of time to finish orders or projects. If you will be unable to fulfill their needs prior to closing, you should return deposits and/or payment for goods not delivered, as well as services not rendered; and
- Paying Taxes and Other Debts: If you are responsible for any employees, complete all final payroll tax deposits and file all final employment tax paperwork. If you plan to sell some business assets, you will need to file some specific forms with the IRS; additionally, you will need to complete several other steps regarding taxes, such as income taxes and sales taxes. An attorney can assist with this daunting process.
If a business is not dissolved legally or properly, the business is still considered by the state to be active. What that means is that the business must remain in compliance with the state, and all that entails. That could include filing an annual report and paying state taxes.
What Legal Issues Arise During Dissolution?
Typically the most common legal issue that arises during dissolution is the settling of business debts and liabilities. For example, if the business is being dissolved due to the business not being profitable, typically that means that the businesses liabilities and debt outweigh business assets. Thus, the business will have to first settle the debt and liabilities before closing up shop. This means that the business must notify all creditor and debts must be satisfied during the dissolution process.
Another common legal issue that arises during business dissolution is fulfilling or not fulfilling any remaining sales or service contracts. For example, a business may have ongoing contracts for the purchase of certain goods or services from another business, and those contracts will need to be fulfilled or cancelled.
Finally, another legal issue that may arise during the dissolution of a business is handling the division of company assets. In many cases, a business may dissolve after years of profitability. If that is the case, the business owner(s) will have to determine whether to sell the business outright, or to dissolve the business and divide the business assets amongst the owner(s).
Typically, the business formation agreement and/or shareholder agreement will outline exactly how a business’ assets are to be divided upon dissolution. For example, the shareholder If not then there will likely be a legal battle over which assets belong to which owner. In such a case a business dissolution lawyer would be able to represent an owner’s interest in dividing business assets.
It is important to note that dissolving the business and distributing business assets will ultimately depend on the type of business that was originally formed. For example, a sole-proprietorship may be dissolved simply when the owner decides to end the business, and the assets would go towards paying debts and liabilities, with the leftover assets returning to the sole-proprietor. In a partnership, the business may dissolve when the partners agree for the business to dissolve, or when one of the partners dies. Once again, the partnership agreement will outline how assets are divided upon the dissolution of the partnership. Conversely, corporations typically may only dissolve upon a majority vote of the shareholders authorizing the dissolution of the corporation. The corporation formation documents along with the shareholder agreement will determine how assets are divided upon dissolution of a corporation.
Do I Need to Consult a Lawyer for My Business Dissolution?
If you are considering dissolving your business, or have been ordered to, you should immediately consult with a skilled and knowledgeable business attorney. An experienced and local business attorney can assist you in determining what steps of the business dissolution you will need to take, as well as help you obtain and file all necessary forms. Additionally, an attorney can also represent you in court as needed, should any legal issues arise.