It’s a fact of life that it’s very possible you may end up having to dissolve your corporation. It’s a common consequence of bankruptcy, or when your corporation suffers an overwhelming loss of property due to a disaster (like a fire or a hurricane). In some cases, corporate leaders may even disagree with each other to such a degree that they’re no longer able to work together, hence the need to dissolve their corporation.
But how does this work? If you and your corporate partners are thinking about dissolving the corporation, this is how it usually happens:
The Need for Formal Dissolution
You may think that you can just literally close your shop doors and stop doing business, and that’s that.
But a corporation doesn’t end until you formalize its dissolution. Even if you simply stop doing business, your corporation may still incur debts and fees, and will still have to comply with corporate requirements.
Your unpaid debts and fees may result in lawsuits and liability down the line, unless you formally dissolve the corporation.
The Vote Among the Board of Directors to Dissolve
The first thing that needs to be done is to confirm that most of the corporate leaders are actually in favor of dissolving the corporation. So, it starts with a board meeting. The board of directors can discuss the matter and maybe try to think of an alternative to dissolution. But if most of the board members vote to dissolve, that’s that.
The Vote Among the Shareholders
Then, a similar meeting must be held with the shareholders. The shareholders also have a voice in the decision to dissolve the corporation. They too, will have a vote.
Normally, the initiative to dissolve the corporation passes with a simple majority of the shareholders. That’s to say, you need 50% of the shareholders + 1. But different states may have different requirements as to exactly how many votes your corporation will need to proceed with the dissolution. In some states, dissolution may require at least a ⅔ majority.
The bylaws of your corporation should describe how these voting processes will be conducted. You also need to abide with the state law. The corporate leaders must follow the bylaws and state law so everything remains above-board.
Fulfilling Financial Obligations
Your corporation has to fulfill all its financial obligations before it can dissolve for good. These obligations include all the taxes you still have to pay.
This is why it’s a requirement in some states that the corporation must first get a certificate of tax clearance from the state Department of Revenue and the IRS. This certificate confirms that you’ve paid all your taxes before you dissolve the corporation.
If this is a requirement, you’ll have to get them before you file your certificate of dissolution. This can take some time, though, just as it takes some time to finish the incorporation process.
Filing the Certificate of Dissolution
The certificate of dissolution is that document that formally ends your corporate activities. In some cases, it’s also called the articles for dissolution.
Normally, you can find the form for the certificate of dissolution with the office of your Secretary of State. You don’t have to file the needed forms in person, as you can do this through email (or even by snail mail).
To complete the form, you will need to put in certain information. Normally, these will include a description of the vote results (the precise percentage of the vote for dissolution), and the members who voted for corporate dissolution.
In most cases, you’ll just need to obtain this certificate of dissolution. However, you need to check as some states may first require you to submit a notice of your intent to dissolve the corporation before you file the form for the certificate of dissolution.
Informing Your Creditors
If you’re thinking about dissolving your corporation to escape your creditors, you better think again. If your corporation owes debt, then you have to notify your creditors. That way, you’re able to give them the chance to reclaim their money. The notification also alerts them that your corporation can no longer ask for additional debts.
That means you have to send a letter to all your creditors. These letters must mention how much time the creditors have to claim their money back. Most states have this period lasting at least 3 years, but you need to confirm the exact time required by the state.
With a 3-year time frame, your creditors should have enough time to act and claim the debts. You can bar their claims if the creditors don’t make their claim during this time frame.
Ending All the Corporate Business Affairs
You’ll need to wind down your business affairs before you can officially dissolve your corporation. If you still have contracts to uphold, you either have to withdraw from them or finish them up. If your lease for your business location hasn’t yet ended, you may have to withdraw from it too. You’ll need to handle all your commitments to employees, and also pay your debts.
After all these, you can then liquidate all the corporate assets. These are your corporate properties, office equipment, and other similar business assets. You may use the money after the liquidation to pay off your debts and other financial obligations. The remaining assets may then be distributed among the shareholders.
Keep in mind that all these steps must comply with state regulations and your corporate bylaws.
Cancelling Registrations and Licenses
You should cancel all your registrations and licenses, as they may not expire automatically. If you have any foreign registrations, you’ll have to cancel them too. If you have received authority to operate your corporation in additional states, you’ll have to file your application for a certificate of withdrawal for each state. That way, these states won’t have to expect your corporation to comply with their requirements and pay their fees.
Failure to do so may result in various renewal fees that may just add to your financial issues. You should also notify the licensing boards so that they can remove your corporation from any mailing lists. It’s also helps them know about which business are still operating in their industry.
Dissolving your corporation must be done officially, just as you incorporated your business officially. You may want to consult with an experienced business lawyer to make sure you cover all your legal bases, and also make sure you do everything properly.
Dissolving your corporation then protects you from further liability, so you can proceed with a clean slate. Without a formal dissolution for your corporation, you may still unknowingly have fees to pay and other commitments to fulfill. Formally dissolving your corporation finalizes the fate and end of your corporation, so that you can finally put this part of your business life behind you.
You’re free to incorporate another business, and try again. And this time, you may have learned from the mistakes of the past and finally have a thriving business!