ComplianceMay 18, 2021

CT Expert Insights: The right way to dissolve a business

If the time comes for you to close your business, it’s not just a matter of shutting the doors for good. There is a formal process you must follow to end your business the right way. In this edition of Expert Insights, CT’s Manager of Customer Service, Tim Jensen, discusses the necessary steps to voluntarily dissolve your business. He reviews why this is a necessary step to end ongoing state obligations—even if you’ve been previously dissolved by the state involuntarily—and how it can protect you from personal liability.

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Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Tim Jensen, manager of customer service at CT Corporation. A few weeks ago, Tim joined us to offer advice and compliance insights on business formation. Today, Tim joins us to discuss a far less pleasant subject, dissolution of a business. And, we certainly hope that that time never comes for your business unless it's on your timetable. But if it does, there are some very important things to keep in mind. And, Tim, it's always good to have you with us. Thanks for your time today.

Tim Jensen: Thank you, Greg, it's great to be back on with you again today.

GC: Well, let's start by defining our terms. So we're all on the same page. What exactly does it mean to dissolve a business?

TJ: Yes, this is a great question. And it's said that ‘all good things must come to an end’ and a business is really no different regardless of the factors that lead to a decision to close a business, which can include retirement, selling, or merging the business or even going out of business, unfortunately. There are several things you need to know to make sure you do it right to protect yourself for the future and filing a dissolution is really the first step.

A dissolution is part of the normal life cycle of the business. And just like when it initially filed to incorporate, there are filings that are required to legally terminate it. In fact, voluntary dissolution is the only way to legally terminate the business with the state or states it's registered in.

GC: Now there are steps that need to be taken in dissolution. Why is it so important to understand these steps and follow them?

TJ: Yeah, this is a question many business owners have. And there are really several reasons to voluntarily dissolve the business. First of all, it is a simple, straightforward and often inexpensive filing. And as I mentioned, it is the only way to legally end the existence in the state or the states the business is registered in. This includes ending any obligations with a state such as end reports and taxes.

And lastly, it confirms all obligations with the state have been satisfied providing that peace of mind going forward, that you have met your obligations to the state and really won't have any future surprises.

GC: Tim, why does dissolution matter?

TJ: Yeah, I often hear this question come up when a business might be in a negative status, such as revoked, suspended or even involuntary dissolved by the state. And the question we get is, did this business still need to voluntarily dissolve if the state has already involuntarily or administratively dissolved it? And the answer is simple. As I just mentioned earlier, a voluntary dissolution is really the only way to legally close the entity with the state.

GC: What risks could you be facing if you don't formally dissolve your business?

TJ: Yeah, if voluntary dissolution is not filed, the states still see the business is active, and they treat it as such, even if they have put it into a negative status for some reason. As I mentioned annual reports, late fees, penalties, and tax obligations will continue and these will kind of always be out there until they're settled. And while states typically don't go after these debts, we did see some states during the Great Recession go after some of these high dollar ones to capture the revenue. And this can be problematic for officers or members of the business if the bank accounts have already been closed. And also, you could run into potential issues down the line if you're trying to form a new business, a company in the future with that state, especially if you have liabilities with the Department of Revenue.

GC: We're talking with Tim Jensen, he's manager of customer service at CT Corporation. We're talking about dissolution and why it's important to follow the steps required to personally dissolve your business. And so, Tim, we've talked just now about some of the risks if we don't go in that direction when that time comes. But are there any additional considerations for dissolutions? And if so, what are they?

TJ: There definitely are and what we discussed so far, you know, up to this point has really been related to that voluntary dissolution, which legally closes the business with the state or states you are registered in. However, there are some additional considerations for closing the business.

For one, if you're still looking to maintain a business, there's the potential to repurpose the existing one instead of dissolving it. Many states allow for the ‘all lawful’ business clause as the principal business activity when the company is initially registered. So you do have the option to keep your existing company open and simply change the name to reflect a new business activity if that's what you're looking to do. The advantage of this is that it'll save you time and money by not having to dissolve and then register a new company. And it keeps your company history such as the filing date along with your EIN with the IRS.

But other things to factor into this, outside of just filing the dissolution itself, is making sure you file all the necessary federal, state, and local final tax forms. These filings will end your obligations with them once they get approved.

Other steps to consider or take would be to notify any creditors about the dissolution that's coming. This lets them know, the business can no longer incur any business debts. And then also close the bank accounts for the business when it's appropriate. And usually, this typically means when you had a chance to settle any of the business debts and pay everything off.

And then if you had any license or permits you had applied for, you want to make sure to take the steps to cancel any of those out to end those obligations as well. And examples of these could include licenses maybe you obtained, such as a food license or liquor license, or permits for sales tax and unemployment taxes.

And one piece of advice that I'd like to give to people that are considering this, just kind of to make sure we have everything covered is to kind of go back and review what was done when the entity was formed and created. And then making sure you just address each of those steps as they come along.

And then lastly, but just as important, is to make sure you keep copies of all your records and filings so you'll have those in case you ever need them in the future.

GC: And we'll get to some of the critical filings beyond what you've already said in just a moment. But you really piqued my interest with what you just said a second ago, Tim. And that's that you kind of want to go over everything that you went through when you went to the formation process with your business entity formation and otherwise.

And so the whole point of that, or at least one of the major points of doing that, of course, is to protect yourself from liability. So let's talk about some of the specifics when it comes to dissolution. How does entity dissolution and withdrawal protect against, say, business identity theft?

TJ: Yeah, that's a great question. And we often think of identity theft is a breach of our personal data and information. It seems like every time you turn on the news, you see a story about this. But business identity theft is actually a growing concern. It is one of the potential consequences of not voluntary dissolving.

By not dissolving, the business remains on the public record, as I mentioned, and even if it's in a negative status, it can be vulnerable for thieves to fraudulently bring the company back into good standing with the state. This then allows them to act on behalf of the company, open up bank accounts, enter into contracts in the former officers or members names, and essentially do whatever they want, you know, with the business.

And to make matters worse, this can also threaten the personal liability protections that were offered by the corporate structure when it was initially created, potentially making the original officers or members of the business liable for any decisions made and debts incurred by those who fraudulently took over the company.

So really, the risk of the rising risk of business identity theft really underscores the importance of voluntary dissolving or withdrawing the business once the decision has been made to terminate it.

GC: Tim, we talked about the filings at a couple different points already. But just so folks are clear, what filings are required when dissolving a business?

TJ: Yeah, and as I mentioned earlier, Greg, it is a straightforward filing process. But there are a couple of states that requires, you know, some extra steps that need to be taken. The first one of those is what's called a Notice of Intent to Dissolve. And some states do require that prior to filing the actual dissolution, you file this notice to dissolve and it simply notifies the state that a dissolution filing is going to be forthcoming.

And then secondly, some states also require tax clearance to be obtained from the Department of Revenue, again prior to filing into the actual dissolution itself. And what this does for those states is it confirms that all your revenue obligations such as any sales and withholding taxes have been satisfied with them.

The filing itself, or the articles of dissolution, is the step that you would take to actually file the dissolution and this would be for your domestic and/or home state or the state you initially filed in. And then if you had a file if the state required that Notice of Intent to dissolve or the tax clearance was required, those forms also need to be submitted along with the actual articles of dissolution filing.

And then if you are registered in any other states, foreign states if you will, you want to make sure to file withdrawal in those states as well. And this is an important step to make sure you legally end the business in all the states you’re registered to transact business in.

And then finally, you know, some states do require a publication notice in a local newspaper that just announces the dissolution of the entity itself.

One important thing to note, and this is some advice I give to, you know, to all the customers that I work with; even if you have no intentions of dissolving anytime soon, it is recommended that you understand what is needed and have a plan in place so that you are ready if and when the time comes to dissolve the entity.

GC: Being prepared is always a good idea whether it's on the formation side, the dissolution side or anything in between and as you've just heard from Tim, there is plenty of expertise to be found at CT Corporation on this subject, and many, many others. So, Tim, thanks so much for your time and for your expertise today.

TJ: Thank you, Greg.

GC: Tim Jensen is manager of customer service at CT Corporation. I'm Greg Corombos. And for more information on this subject, please call CT at 844-787-7782.

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