Businesses close for many reasons. You may be closing a business that doesn’t fulfill the goals you set. Perhaps something completely unexpected happened that caused the business to fail — like a global pandemic. Or maybe the business didn’t fail but it was opened to fulfill a specific goal and that goal has been met. Whatever the reason, you can move on with a clean slate — provided that you properly dissolve the business that’s ceasing operations. Wrapping things up is different depending upon whether the business is owned by a sole proprietor or partnership or if it is owned by a corporation or limited liability company (LLC). If you are operating as a corporation or LLC, simply abandoning the corporation or LLC could result in disastrous consequences down the road. You must go through the process of dissolving your corporation or LLC with the state of formation to avoid those consequences.
Dissolution is a legal process that terminates a business entity’s existence. If a corporation or LLC is not properly dissolved, it continues to exist as a legal entity under state law. This means that it still faces corporate or LLC filing requirements, such as annual reports and franchise taxes. Failing to meet these continuing obligations can result in additional fines, taxes, penalties and potential liability, some of which may extend to you personally.
Dissolution is a multi-step process involving a flurry of paperwork, including interdependent filings of dissolution documents with the state business entity filing office and the federal, state, and local tax departments, and notifying creditors, and settling claims.
Owner approval is the first step
Dissolving a corporation or an LLC generally requires the approval of the shareholders or members. Most states have default rules for obtaining this approval, but many times the corporate bylaws or the LLC’s operating agreement spells out the process for dissolving.
For corporations, the board of directors should draft and approve the resolution to dissolve. Then, if necessary, shareholders vote on the resolution. Both actions should be documented in the corporation’s record book. Most states don’t impose as many requirements for approval and documentation on an LLC, but best practices dictate that the members’ approval of the decision to dissolve be documented.
Winding up affairs
The corporation and LLC laws require the winding up of the corporation’s or LLC’s affairs, the liquidation of its assets, and the distribution of any remaining assets to the shareholders or members before the corporation or LLC’s existence can be terminated.
Winding up includes, among other steps, notifying creditors and satisfying claims, withdrawing from foreign states in which the corporation or LLC is qualified to do business, canceling permits and licenses, paying taxes, and filing final tax returns.
Obtain a tax clearance if necessary
A tax clearance is often required to effect dissolution. A tax clearance is a certificate from the state tax department certifying that the corporation or LLC has satisfied its tax and reporting obligations. This tax clearance serves as proof that no back taxes are owed before filing dissolution papers. Check with the Secretary of State for the tax clearance rules you need to comply with when dissolving a corporation or LLC.
The procedures for obtaining tax clearances vary widely from state-to-state. In some states, it may take a long time to obtain this document — even if no taxes are due and owing. Because it is a prerequisite to filing for dissolution, waiting until the last minute may slow down the entire dissolution process.
As with all other requirements, state rules vary regarding creditors. Some states require that you notify creditors and resolve claims before the dissolution documents are filed with the state. Conversely, other states require the dissolution documents be filed before notifying the business’s creditors and settling claims. Check the requirements with the appropriate statute so that the dissolution process is not halted.
When notifying creditors, you generally must provide the deadline for submitting claims. Some state statutes require dissolving entities to publish notices of dissolution to notify creditors not known to the corporation and allow them to submit claims. You must comply with state statutes when notifying creditors as well as when settling claims, so you should consult your attorney to avoid running afoul of state laws.
Cancel business licenses and permits
An often overlooked piece of the dissolution process is the cancellation of licenses and permits held by the business. Because licenses and permits are issued at the federal level as well as at multiple state and local government levels, numerous cancellations may be required depending on your business’s industry and where you transact business.
And, once again, remember to cancel permits in each state where you have been operating. And if your company has registered an assumed or DBA name, that should be canceled as well.
Withdraw from foreign states
If your corporation or LLC is qualified to do business in foreign states, it must withdraw from those states as part of the winding-up process. This will require paying taxes and filing annual reports due to those foreign states as well as filing an application to withdraw. A tax clearance may also be required in some states.
Properly file dissolution documents
Once the dissolution has been approved by the entity, a Certificate of Dissolution (also called Articles of Dissolution or Certificate or Articles of Termination) must be filed with the company’s home state. In some states there are two filings — one after dissolution is approved and another after the winding-up process has been completed. In others there is only one filing. Check the relevant statute to make sure all required filings are made and done so at the appropriate time.
Submit final tax documents
Tax filings are required for dissolution. When you dissolve your corporation or LLC, you must be sure to file the required federal, state, and local tax returns and documents. These can include income taxes, as well as employment taxes and sales and use taxes.
In most cases, there are deadlines that you must meet to avoid penalties. Consult your accountant or tax advisor for the tax requirements you must fulfill and the deadlines for doing so, including how to report the distribution of assets to the Internal Revenue Service (IRS).
Whatever the reasons for dissolving your company, there’s little doubt that you'll have multiple responsibilities regarding the end of your business operations. You may find it beneficial to enlist the services of an entity compliance company, such as CT Corporation. Doing so simplifies the preparation and filing of the dissolution documents with the necessary states—and ensures the filings are done correctly and in a timely fashion.
Learn more about CT’s dissolution and withdrawal services.