Dissolving a Small Business

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 What is Business Dissolution?

A business dissolution marks the end of the life of a business. A business dissolution is the formal closure of the business with the state in which the business is registered to do business.

It is important to be aware that there are several steps which must be taken before a business is legally dissolved. In other words, an individual cannot simply cease conducting business or claim that their business is closed.

In the case of a small business, if a limited liability company (LLC) or a corporation was formed, the business must file articles of dissolution with their state in order to completely terminate the business. Filing articles of dissolution notifies the Secretary of State that the business is formally closed.

A business dissolution may occur for one of several reasons, which may include:

  • Financial losses;
  • Bankruptcy;
  • The owner no long as the time or will to keep the business in operation;
  • Retirement; and
  • A change of career.

A state may also force a business to dissolve if the business taxes were not paid. This is called an administrative dissolution. An administrative dissolution may also occur if an annual report was not submitted.

What Can I Do to Prepare for a Business Dissolution?

It is important for an individual to dissolve their business properly in order to avoid legal issues down the road in order to protect themselves as well as their credit and community reputation. There are some ways in which an individual may be able to prepare for a business dissolution, including:

  • Notifying the IRS as well as all other appropriate local and state tax agencies;
  • Cancelling all business licenses;
  • Notifying other businesses who do business with the company, including:
    • creditors;
    • insurers;
    • lenders;
    • vendors;
    • service providers; and
    • suppliers;
  • Notifying the landlord if the business is leasing or renting the company’s premises;
  • Collecting any debts that are owed to the business; and
  • Selling company assets, such as:
    • furniture;
    • equipment; and
    • property.

Dissolving the business generally begins with the previously discussed preparations. A business dissolution lawyer can assist during the process by ensuring that an individual has taken all of the necessary steps prior to proceeding with the business dissolution, as these steps may vary from state to state.

How Can I Dissolve a Small Business?

If an individual owns a small business and is planning on dissolving that business, there are several things they are required to do in order to properly dissolve the business. The required steps are the same for all small businesses regardless of whether they are a partnership, a corporation, a limited liability company (LLC), or a non-profit corporation.

In the majority of cases, the process for business dissolution will be provided in the company’s bylaws and policies. Therefore, a good place to start when it comes to dissolving a business would be to review the company bylaws.

An individual should check the bylaws and policies to determine if there are any specific instructions and preferences which the organization would like to follow. There are also federal and state guidelines that an individual will need to follow during the dissolution.

What is Required to Dissolve My Small Business?

There are numerous steps that an individual must take in order to legally dissolve their business. A business cannot simply “close up shop.”

The requirements for dissolution may vary depending upon the makeup of the company as well as the state in which the company is qualified to do business in. In general, the business will likely be required to do the following:

  • Vote to close the business, among shareholders or members, according to the bylaws in the company’s organizational documents. If the bylaws do not include a voting procedure, the business can follow the state in which the company does business for dissolution;
  • File for dissolution with the state or states where the company does business;
  • Cancel all licenses, permits, as well as any fictitious business names used by the company;
  • Give notice of dissolution to all creditors, as well as a new address where they can contact the business or the other members or shareholders;
  • Settle any outstanding debts which are owed by the business;
  • Close all bank, service and credit accounts under the company’s name; and
  • Distribute the company assets among the owners. If the business is going to sell any business property, additional forms with the IRS may be required.

The laws for dissolving businesses are different in every state. Because of this, an individual should contact the office of the Secretary of State to obtain the exact filing requirements for the state or states where the company does business.

What if I Have a Business Partner or Partners?

Even when a business has ended, that does not necessarily mean that the partnership has ended as well. It is important to be aware that a partnership can exist independently of the business.

Therefore, if an individual wishes to terminate the partnership as well as terminate the business, they must inform their partners regarding the decision in a separate forum. The dissolution of the partnership must be made between all the partners as a mutual agreement. A partnership may also be dissolved upon the death of one of the partners.

How is the Business Still Incurring Debt if I Dissolved it?

Dissolving businesses terminates the company as a legal entity. However, if a business continues to incur debt, the required steps may not have been completed or may not have been done properly.

For example, the IRS and local or state governments require final taxes to be paid off prior to a business being considered closed. This requirement is especially important with regards to partnerships. Each of the partners bears the debts and costs associated with any of the obligations which are undertaken by the partnership.

What Legal Issues Commonly Arise during a Business Dissolution?

During a business dissolution, there are several complications which may arise. The dissolution process may often uncover long-standing issues which need to be addressed.

One common legal issue which arises during dissolutions of businesses is shareholder rights and dividend disputes. For example, there are some shareholders who may complain regarding the share of profits which they receive during the process.

It is important to note that the distribution of profits among shareholders will usually be provided in the company bylaws. This issue illustrates the importance of a business having bylaws which are clearly written.

Another common dispute which arises during business dissolution involves the distribution of company property. In some cases, a creditor may be able to claim company property as payment on a debt. If this occurs, an appraiser may be required in order to determine the value of the company’s property.

Do I Need an Attorney to Assist Me in the Dissolution of My Small Business?

Yes, it is very important to have the assistance of a small business lawyer for the dissolution of your small business. Dissolving a business typically occurs following an extremely difficult period, both financially and emotionally.

This is especially the case if there was a breakdown of the relationships among members, shareholders, and partners. Your attorney will be able to assist with facilitating the dissolution process and help ensure that your rights are protected.

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