Business dissolution may occur when a company needs to be terminated. Understanding how to dissolve a business involves knowledge of the nature of your business as well as the laws in your area. There are a number of important steps that you should consider when reviewing how to dissolve a business, including:
- Holding a vote to formalize the decision to dissolve the business
- Filing the required documents with local, state, and federal governments as necessary
- Paying off any debts and taxes
- Canceling your business licenses, permits, and business names
- Sending notifications to your employees, customers, and creditors
In most cases, the process for dissolution will be stated in the company’s bylaws and policies. Thus, a good place to start when it comes to dissolving a business is to review company bylaws- check to see if there are specific instructions and preferences that the organization would like to follow. There may also be state and federal guidelines for businesses to follow during dissolution.
What Are Some of the Effects of Dissolving a Business?
Before you consider how to dissolve a business, you should understand some of the results and consequences of business dissolution. Business dissolution may result in the following:
- All assets will be released by the company- shareholders may receive their portion of the profits, but only after debts have been paid out to creditors
- The business is officially terminated upon the dissolution, and the organization must be reinstated if operations are to resume
What Are Some Common Reasons for Business Dissolution?
Thus, dissolving a business is a major event that may affect several different parties. Business dissolution can occur for a number of different reasons, including:
- The sale of all business property and assets
- The business is no longer profitable to maintain
- It is no longer practical to maintain business operations due to the death of a key member
- The purpose of the business has been achieved
Before beginning the dissolution process, you and your organization should take several steps to prepare. This may include reviewing insurance policies, organizing inventory sales, dealing with employee layoffs, and reviewing any open contracts that might be in effect.
Is Dissolution the Same for All Types of Businesses?
No- the specific details for how to dissolve a business will vary depending on the type of business formation involved. For example, there may be different laws for dissolution of the following types of business entities:
- Sole Proprietorships: These types of businesses are operated by a single owner. Thus, dissolution may occur upon the owner’s death, or when the owner decides to dissolve the operation. Upon death, the business assets (and debts) are merged into the estate of the owner.
- Partnership: Partnerships may be dissolved upon the death of one of the partners, or upon the mutual agreement of the partners.
- Corporation: Corporations involve many different parties; dissolving a corporation depends on a vote by the shareholders
What Legal Issues Commonly Arise during Business Dissolution?
During dissolution, several legal issues may arise. The dissolution process can often uncover long-standing issues that need to be addressed. A common legal issue connected with dissolution is that of shareholder rights and dividend disputes.
For example, some shareholders may complain about the share of profits that they receive during the process. Again, the distribution of profits among shareholders will typically be stated in the company bylaws. This underscores the importance of having bylaws that are clearly written.
Another common dispute involves the distribution of company property. In some cases, creditors may be able to claim company property as debt payment. If this is the case, an appraiser may be needed to determine the value of the company’s property.
Do I Need a Lawyer?
Determining how to dissolve a business can be challenging. This is because there are many different issues and tasks that need to be addressed before the business can be ended. If you need assistance with business dissolution, you may wish to contact an experienced business attorney in your area. Your lawyer can help you file the papers that are needed, and can help you resolve any disputes that might arise in connection with the filing.