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ComplianceApril 14, 2023

What is corporate dissolution vs. withdrawal?

If you are the owner or manager of a corporation or LLC and you’ve decided to stop doing business, you may be wondering how to officially close your business. To do this you have two options: corporate dissolution or corporate withdrawal. But what is dissolution and what is withdrawal?

Corporate or LLC dissolution vs. a withdrawal

Corporate or LLC dissolution is an official filing with the state where your business was originally formed. The action will terminate the legal existence of your company — wherever it does business.

A withdrawal of a corporation or LLC merely removes your company’s right to do business in a particular state but the company may continue to exist and do business elsewhere.

How do you know if you need to withdraw from a foreign qualified state?

If your company continues to be foreign qualified in a state other than your formation/domestic state, it must comply with state laws. For instance, you must continue to file an annual report and maintain a registered agent.

If you wish to close your business and avoid compliance with these requirements in the foreign-qualified state, your corporation or LLC must enter a statutory procedure known as “withdrawal” or “cancellation” (the more common term in certain states with regards to LLCs).

If your company continues to exist in another state, typically there is no requirement to file any documentation with the Secretary of State’s office notifying the state that your company no longer does business there.

Always refer to the state’s corporation or LLC statute. This can help you determine what steps you must take to “withdraw” from that state.

For more information, see Compliance smart chart: State-by-state requirements for voluntary withdrawal of foreign corporations and LLCs and What should a company do when it stops doing business in a foreign state.

What are the steps for withdrawal?

Withdrawal from a state where your business is foreign qualified typically involves the following:

  • Paying all fees and taxes due
  • Filing all reports due
  • Filing an application for withdrawal (often referred to as a Certificate of Withdrawal) with the filing office

Why do you need to dissolve a business?

If your LLC or corporation is not properly dissolved, it will continue to exist as a legal entity under state law. As such, you would still need to comply with corporate or LLC filing requirements, such as annual reports and franchise taxes.

Failure to do so could result in fines, taxes, penalties, and other liabilities — some of which could extend to you personally.

Another risk is business identity theft. Identity thieves scour government websites searching for corporations or LLCs listed as delinquent or suspended. It’s relatively easy for these bad actors to take steps to place a business back into good standing or reinstate it if it’s already been dissolved.

Worryingly, this can be done without your knowledge. If this occurs, the criminal has the authority to act on behalf of your company, including applying for new business loans or lines of credit and signing new contracts. Business identity theft can also threaten the personal liability protection afforded by the LLC or corporate structure — making you liable for any debts incurred by identity thieves.

Does the dissolution process differ for LLCs and corporations?

Although requirements vary from state to state, the dissolution of a corporation or LLC generally is the same for both.

How do you dissolve a corporation or LLC?

Typically, the dissolution of a corporation or LLC involves the following steps.

  • Gain owner approval – Dissolving a corporation/LLC generally requires the approval of shareholders or members.
  • Obtain a tax clearance – If necessary, you may need to obtain a tax clearance certificate from the state tax department. This certifies that your corporation/LLC has satisfied its tax and reporting obligations.
  • Notify creditors – Some states require you to notify creditors and resolve claims before you file dissolution documents. Other states take a reverse approach and require that you file dissolution documents before you notify your business creditors and settle claims.
  • Cancel business licenses and permits.
  • Withdraw from foreign states – If your corporation/LLC is qualified to do business in foreign states, you must properly withdraw from those states as part of the winding-up process.
  • File dissolution documents – Once the dissolution of your corporation/LLC has been approved by the entity, you must file a Certificate of Dissolution (also called Articles of Dissolution or Certificate of Articles of Termination) with your company’s home state.
  • Close out taxes – Pay any taxes due and file a final tax return.

For more information, see Closing your business? Corporation or LLC dissolution requires proper filings.

Let CT Corporation help you every step of the way

If you’re considering closing your business, CT Corporation can help you dissolve your corporation or LLC properly and in compliance with state laws and local jurisdiction requirements. We provide business entity dissolution and withdrawal services for all 50 states and D.C.For more information, please contact us or call us at (844) 878-1800.

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The CT Corporation staff is comprised of experts offering global, regional, and local expertise on registered agent, incorporation, and legal entity compliance.

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