ComplianceMarch 27, 2023

CT Expert Insights: What does dissolution mean in business?

Although the dissolution of a business is often overlooked in terms of a business lifecycle, it is still an important step that requires thought and planning — especially since there are legal and financial ramifications involved.

Mike Enright, Operations Manager at CT Corporation, discusses what it means to dissolve a business, including the differences between withdrawal, corporate dissolution, and having a business administratively dissolved by the state. He explains how business dissolution is a multi-step process that goes beyond the official filing of a Certificate of Dissolution. He also provides compelling reasons for properly dissolving a company once it stops doing business, including mitigating the risks of business identity theft and financial and other liabilities.



Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Mike Enright. He's an account manager for CT Corporation. Today we're going to be talking about dissolution. It's not something that business owners want to think about. But if it becomes necessary, it's important to know the process. And, Mike, it's always good to have you with us.

Mike Enright: Thank you. Same to you. Good to talk to you again, Greg.

GC: Well, like I said, at the very beginning, it's not a pleasant topic usually when you're dissolving the business. So talk about why we need to know these things before we get into some of the details.

ME: So dissolution is oftentimes an overlooked portion of the lifecycle of the business. It's not something anyone wants to think about. But it's also a very important step for a lot of reasons — just to make sure that the company is wound down as appropriately as possible and that you have all your ducks in a row to avoid any follow-up issues that could result from not doing it properly. So it's something we talk about a lot. It does come up in a couple of different ways. And it is something that's really important to focus on if you get to that point in the lifecycle of the business.

GC: Alright, Mike. Let's get into the nuts and bolts here. What exactly is dissolution?

ME: So when thinking about dissolution, or winding down a business, there's really two scenarios that we see. The first and more broad scenario is a corporate dissolution. And this is an official filing where the state is contacted and informed that the business is being shut down. This is being done in the state where the business was originally formed. The action will fully terminate the legal existence of the company wherever it does business. The second scenario that we see is what we call a withdrawal, which merely removes the business' right to do business in a particular individual state. So the company can continue to exist and do business elsewhere. It's just focused on that one individual foreign state outside of your domestic state of incorporation. For example, if you're originally registered in Wisconsin, but also registered as a foreign corporation across the border in Illinois and no longer need that Illinois piece, that would be considered a withdrawal. Whereas Wisconsin, your domestic state, is still active and registered. Conversely, for example, if you are running the same business and were fully shutting it down, maybe you're retiring, and your small business isn’t continuing, then you need to withdraw from Illinois but also filed that full dissolution with the state of Wisconsin to officially close it down.

GC: Important distinction there. And there's another distinction to make here as well, and that's the term known as administrative dissolution. What exactly is that?

ME: So this is something that comes up a lot in my conversations with business owners. Administrative dissolution is an involuntary dissolution action taken by the Secretary of State, or whatever they call it in your state, that results in the loss of the business entity's rights to do business in that particular location. Typically, this comes from not filing your annual report for a set period of time, and the state would ultimately shut down the business or dissolve it by actions. States have different names for this, such as revocation. Some call it void. But most commonly it's called administrative dissolution. I find in my conversations with business owners, the entities’ principals often don't know that involuntary dissolution happens until they try to do something with the company. For example, try to file a document, try to either execute or respond to a lawsuit, enter into a merger or sale, find investors, things like that. So the administrative dissolution is actually an action that the state takes based on certain criteria that you haven't been responding to. And they flag you as being administratively dissolved, as opposed to sort of an official formal dissolution, as I mentioned a moment ago.

GC: So let's talk about an important thing to consider in that circumstance. If I'm in an administratively dissolved status, and I'm not using my entity at that point, can I just leave it that way? Or do I need to take action?

ME: That's a great question. And it's a question that I hear a lot. And the answer is “no” for a few reasons. If you are [in an] administratively dissolved status, and you discover that. And you also realize, well I’m not acting there anyway, there are still steps you want to take to officially dissolve the business. And the reason you want to do that is failure to do so kind of leaves yourself open to additional fees and penalties from where you are now. You know, additionally, you know, other parties, such as those you're entering into contracts with, will typically do their due diligence to look at your entities across the various states. And if they see that you're in this negative administratively dissolved status, it can kind of show that you haven't kept up on proper filings for your entity. So in other words, it can kind of show you don't have your ducks in a row, which is important regardless of where you're doing business and what the circumstances [are] in that particular state.

GC: All good tips, and this follows right on the heels of it with some more good information, why does a business need to dissolve a corporation or an LLC?

ME: So this is another common question and a conversation I have a lot. Whether you want to fully close down the business or you no longer have the need to be registered in a particular state, or you find yourself in an administratively dissolved status, the best practice and the state's expectation is that you officially dissolved the entity. So very broadly, if the corporation or LLC is not properly dissolved, it continues to exist as a legal entity. And as a result, the business will still need to comply with corporate or LLC filings, such as annual reports and franchise taxes and things like that. So failure to do so can result in fines, taxes, penalties, other liabilities, and things like that. Even if the company goes into an administrative dissolved status, the state would potentially reserve the right to come after you for those past due fees. So it's important to take that step.

Another thing that we've seen recently is that there's a rise in business identity theft. And this is something we've seen a lot in recent years. We found that identity thieves tend to scour government websites searching for corporations that are delinquent or suspended, and can ultimately sort of uptake them and act on their behalf. It's relatively easy for those bad actors to take steps to place a corporation or LLC back into good standing or even reinstate it if it's been dissolved. This can be done without anyone's knowledge, and you turn around and all of a sudden, you realize there's a line of credit opened on behalf of your business. If they do this, the criminal could have [the] authority to act on behalf of the company, including, like I said, applying for loans, lines of credit, signing contracts. It also kind of leaves open your personal liability, because they could kind of seep into your personal liability as a result of that as well. So you could be liable for any debts incurred by these identity thieves. So if you're no longer operating the company, either broadly or in a particular state, it's best practice to take the relevant actions to voluntarily and safely dissolve that business, or withdraw from those foreign states. By doing so, it'll help ensure the business doesn't face an elevated risk of, as I mentioned, identity theft. And [it] also just shows that you've taken the proper steps to wind up the business if, in fact, you're not using it.

GC: We're talking with Mike Enright. He's an account manager at CT Corporation. And going through the key points to know when it comes to dissolution and a number of different formats. Just a little bit earlier in the conversation, Mike, we talked about the example of a business based in Wisconsin deciding that it doesn't need its place in Illinois anymore, it can close down that operation known as a withdrawal. So how do you know if you need to withdraw from a state?

ME: Another common question. And especially recently, after the past couple of years with the boom of remote workers, for example. Maybe you hired somebody in a particular state, and they're no longer with your organization. This comes up a lot. If a company continues to be foreign qualified in a state other than its domestic state, again, it does have to comply with those laws. For example, you need to file an annual report and things like that. The ultimate decision in a lot of cases is sort of an internal decision you make on whether or not, in the example of foreign states, will you be back in that state anytime soon. Are you fully wrapped up there? Do you have any sales, employees, or things like that? If you're closing a business and you want to avoid compliance with these requirements, then you must take that action to withdraw, cancel, or dissolve that entity. It's always a good idea to refer to the state's corporation or LLC statutes just to determine what steps you need to take to withdraw.

However, the state statutes and requirements can be challenging to interpret. So I always recommend reaching out to parties like CT Corporation for help in that regard, just to be certain that you know the steps that have to be taken in those particular states. I’ll also mention that in my conversation with business owners surrounding withdrawals specifically, there are times that folks will decide just to keep an entity registered and continue to file those reports, just in case the need for that state comes back. In a lot of situations, the costs are minimal to maintain the entity there, especially if you're not actively transacting business. In the example of remote employees, it can leave the door open to easily and quickly hire somebody else there if the need arises.

GC: Mike, we've talked a lot about the “why” and the “what” here. Let's move on to the “how”, the actual steps you need to take to dissolve a business. So it is a multi-step process, like many things when it comes to compliance. So what do we need to know?

ME: You're right, and dissolution is a multi-step process. And that's something that often goes unknown to customers that it's not just as simple as filing a document with the state. That's a big part of it. But if you are fully closing down and dissolving the company, owner approval is a big first step. Dissolving the corporation or LLC generally requires the approval of the shareholders or members in the company. And some states actually require that you show evidence of this from your internal records. Regardless of if they require that, you should have some sort of internal documentation showing that a decision was made to dissolve.

Some of the other steps that are included would be some states requiring a tax clearance, reaching out to the Department of Revenue just to show that you've paid all the necessary taxes. You'll want to notify your creditors that you're in the process of dissolving or have already dissolved. You'll want to cancel business licenses and permits, and this is one that's often overlooked. Locally, if you obtained a license or a permit, local governments may expect that you renew those on an ongoing basis. I mentioned withdrawal a few times a minute ago, you'll want to withdraw from your foreign states if you have any of those. When it comes to filing the dissolution documents, you'll need to file a Certificate of Dissolution. Some states call it something else like Articles of Termination. But you'll file that with your company's home state. You'll want to submit any final tax documents. That can go hand in hand with attaining that tax clearance. And there's a couple of states out there that have some extra steps. For example, some states require that you first submit a notice of intent to dissolve. Just that you're showing them that you have a plan for dissolution, and then in turn, you would ultimately file that dissolution. Secondly, I mentioned some states require tax clearance to be obtained from the Department of Revenue. That is a step that can sometimes take months, depending on the state. So it's something that you want to plan for as you're setting off on this process.

GC: Well, Mike, as we said, it's not a pleasant thing to think about. Unless of course, you're retiring after a very long and successful career. That would be a happy dissolution. What other thoughts should business owners keep in mind as they consider whether they need to do this and how to carry it out?

ME: Yeah, there's a lot of reasons for dissolving. And sometimes it's not a pleasant thought. Sometimes it's just a change in structure that ultimately results in a business entity needing to go away. But regardless of the reason, there's little doubt that you'll have multiple responsibilities in ending the business operations. With dissolutions, I think it's always a good idea to reach out to experts in the area, such as CT Corporation. We can help you navigate the state statutes on what's required, but also make that filing process pretty seamless and make sure it happens quickly and efficiently. I think doing that will simplify the preparation and also the filing of those documents. And again, just make sure it happens in a timely fashion so it doesn't linger on longer than it needs to.

GC: Mike, you've given us a great deal of excellent information here on dissolution. And so we thank you as always, for your expertise, and for making it so easy for us to understand. Thanks for your time.

ME: Thank you very much, Greg

GC: Mike Enright, account manager at CT Corporation. I'm Greg Corombos reporting for Expert Insights. For more information on this subject, please contact a CT Corporation specialist today.

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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