Dissolution is a legal process that terminates a business’s existence. If a business 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.
CT Tip: In addition to dissolution in the state where you initially formed your corporation and LLC, you must also file articles of withdrawal with each state where you have registered to do business (“foreign qualification”). Follow the items in this checklist for each of those states as well.
Dissolution is a multi-step process involving a flurry of paperwork, including interdependent filings of dissolution documents with the state, federal, state and local tax filings, 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.
CT Tip: 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.
Obtain tax clearances and notify creditors, if required
The requirements for dissolution vary by state. Tax clearance is often required to effect dissolution. 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.
CT Tip: The rules regarding 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 to the last minute may slow down the entire dissolution process.
In addition to obtaining a tax clearance, some states require the filing of a statement of intent to dissolve, notification to creditors, and settlement of creditors’ claims. As with all other requirements, state rules vary regarding creditors. Many states require that a company that is dissolved or intends to dissolve notify its creditors of its dissolution and provide the information needed by creditors in order to submit their claims.
CT Tip: 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 secretary of state so that the dissolution process is not halted.
When notifying creditors, you generally must provide the deadline for submitting claims. This state-mandated requirement is usually 120 days from the date of the notice. Some states 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.
Properly file dissolution and withdrawal 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. Remember, you must file Certificate of Withdrawal in every state where you have foreign qualified—and, each of these states will have their own tax clearance and creditor notification requirements.
Submit final tax documents
Tax filings are required for dissolution. When you dissolve your business, 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).
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.
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.