It is always a tough decision for an entrepreneur to dissolve his company. But there comes a time when he cannot continue with the business operations. It’s a stressful time and requires a multi-step process. Dissolving a company involves much more than just locking the front door. To dissolve a company, we need to officially and formally close the business. You need to deal with the assets and liabilities properly, in the same way, that an executor would settle all assets, debts, and affairs of a deceased person. Let’s understand what business dissolution actually involves, what steps are required and why it is required.
What do you mean by business dissolutions?
According to the Business Dictionary, Business dissolution is defined as the end of a firm’s independent existence. Businesses dissolve for several reasons, for example if the owner retires and has no one there to take his place or if the owner wants to change careers. One of the most common reasons however is if the business goes bankrupt. In some cases, the businesses undergo administrative dissolution, which happens when the state government forces the business to dissolve after it fails to pay the taxes, fails to submit an annual report or fails to keep up with some other aspect of its responsibilities.
Business dissolution indicates that it ceases to exist as before. It may resume in the form of a merger, a partnership, a consolidated company, or as a new company altogether. Business dissolution may result in new entities. Dissolving a business involves sending of Articles of Dissolution and a notice of intent to dissolve to the particular state and country offices of business license issuance. Also, sometimes you may need the evidence of debt repayment and profit distribution to complete the legal requirements for business dissolution.
Reasons for Dissolutions
The reasons for dissolution can be as simple as low cash flow or as intricate as conflicting partner disagreements. Other reasons why business owners officially and legally dissolve businesses is to avoid fines, fees or continuous liability of a company. Here are some of the reasons explained:
- Partnership Disagreements: About 50% of businesses in the U.S dissolve because of the differences in the opinions of the partners. Partners might not be able to settle the disagreements related to each other’s role, which new products or services to offer, etc. The main reason is that they might not be able to reconcile their disputes over the issues they once agreed to in the legal documents. And according to those documents, the partners are likely to close the business through dissolution.
- Low Cash Flow: It is a common reason for most of the businesses to dissolve. Businesses without enough cash cannot sustain themselves through the economic cycles. They may find it difficult to pay the debt through loans or credit charges that can’t be immediately repaid.
- Mismanagement: A CEO with little or low vision can put their business at risk or failure. To create a company’s vision, an entrepreneur is required to set proper goals for his diversifying products and services. A skilled businessman is required to be skilled in managing all aspects of his company, including production, finance, purchasing, sales, training, hiring, and overseeing staff, unless and until he brings in a manager to look after these things. If a company lacks these things, mismanagement can become a long-term problem that no company can withstand continually.
- Negligent Accounting Practices: It is vital for a business to keep track of all the payments and expenses. Basically, businesses require having an accounting system that prepares profit and loss statements as well as other financial documents. If all of these things are not managed properly, the outcome is dissolution. Before dissolving, a business owners notify their customers, suppliers, vendors, government revenue services, banks, credit card companies, and other parties affected by the accounting practices that the business is legally closing.
Conditions for dissolving a business
The company can only be dissolved from the Companies House Register if the following conditions apply:
- The company has no assets, property or cash at the bank.
- The company has not traded for three months; this must be a definite cessation of the trade!
- The company has not changed its name officially in this period.
- The creditors are circulated and requesting their approval for the company to be dissolved under this process.
- The company has not disposed off any property or assets, which includes land and buildings, plant and equipment, debtors and other assets.
- Creditors are given three months to acknowledge the request to dissolve the company and can even reject such a request.
The Process of dissolution
- Corporation or LLC action: If there are more than one company owners, all of them must approve the dissolution of the business. With corporations, the shareholders must approve the action, whereas, with the limited liability companies (LLCs), the members must grant the approval. For small businesses, members or shareholders usually get involved in day-to-day operations, and are aware of the details. The bylaws of a corporation and the LLC operating agreement generally outline the dissolution process and the required approvals. To abide by the formalities of a corporation, the board of directors needs to draft and approve the resolution to dissolve. Then, the shareholders vote on the director-approved resolution. Both of these actions require proper documentation and should be placed in the corporate record book. In the case of LLCs, they are not subject to the same formalities, but documenting the decision and member approval is recommended.
- Filing of the Certificate of Dissolution with the state: Once the voting for the dissolution is done by the shareholders or members; you need to file all the required paperwork with the state in which the business is incorporated. Also, if the company is qualified to transact business in any other states, paperwork needs to be filed in these states as well. The process for the Articles of Dissolution or the Certificate of Dissolution varies from state to state. Some states may ask you to file documents before resolving claims and notifying creditors, whereas other states may require to file them after the process. Certain states also require tax clearance for the company before filing the Certificate of Dissolution. In such cases, any back-taxes that are owed by the corporation or LLC must be paid first. Your registered agent or Secretary of State’s can help you with the complete details.
- Filing federal, state, and local tax forms: Ending your company’s operations doesn’t mean that your tax obligations are ended immediately. First, you need to formalize your business closing with your state, IRS and the local taxing agencies. You can check the business closing checklist, which includes the required forms, links to additional state and local requirements at the IRS website. If you have employees, make sure to check the payroll reporting obligations. It is always recommended to consult your tax advisor or accountant for any of your particular requirements.
- Notifying creditors your business is ending: Make it a point to inform all your company’s creditors by mail to explain:
– Your corporation or LLC has filed the statement of intent to dissolve or has been dissolved.
– The new mailing address through which the creditors must send their claim(s).
– A list of the information that should be covered in the claim
– The deadline for submitting the claims (often, 120 days from the date of the notice)
– A statement that claims will be rejected if not obtained by the deadline.
– Your state may also allow for the claims from the creditors that are not associated with the company at the time of dissolution. You may also be required to place a notice in the local paper about your company’s dissolution.
- Settling creditors’ claims: Creditor claims can be either accepted or rejected by your company. Accepted claims need to be paid, or adequate arrangements are required to be made with the creditors for repayment. For instance, a creditor may agree to settle the claim for less, maybe 80% than the original amount. With the denied claims, you must advise the creditors in writing that your company denies their claims.
- Distribution of remaining assets: After all the claims are paid, the remaining assets can be distributed to the company owners in proportion to the share of ownership. For instance, if you own 60% of the business and your partner owns 40%, you receive 60% of the remaining assets. Distributions are required to be reported to the IRS. If your corporation has various stock classes, corporate bylaws usually outline the method used for distributing assets to these shareholders.
Dissolving your company cannot be used if?
A formal bankruptcy or liquidation procedure is ongoing, or its proceedings have been started. These procedures include a CVL, CVA, receivership, administration, or compulsory liquidation under the Insolvency Act 1986, or scheme of arrangement under the Companies Act 1985.
Any petition has been issued against a company (for administration or compulsory liquidation) then dissolution cannot be completed.
Consequences of Not Dissolving a Corporation
When a corporation has discontinued doing the business, and the corporate charter is no longer wanted, it is necessary that the corporation decides to dissolve in order to avoid future Corporation Business tax, penalty, and interest.
Failure to dissolve the corporation when the corporation has stopped doing business will result in the legal requirement to continue to file Corporation Business Tax returns with the necessary payment of the minimum Business tax.
The dissolution shall be regarded as filed and effective as of the date the IRS receives the properly finished and executed Articles of Dissolution, payment of all fees, and notice of Tax Clearance from the Division of Taxation. Also, all the business tax eligibilities for the corporation will be terminated as of the date the request for dissolution is received and accepted by the IRS. However, prior tax liabilities may still apply and be subject to the IRS’s review.
If dissolution procedures are not executed, and full payment of the outstanding liability will not accepted, the case will be forwarded to the Special Judgment Section, for further collective action. Also, Notice and Demand for Payment letters will be sent to the Corporation and, in the event, there is a prominent trust liability, to the corporate officers.
Is the dissolution process different for both a limited liability company (LLC) and a corporation?
Since the continuation of LLCs are less steady than that of the corporations, an external occurrence such as the death of an owner can lead to the end of a company’s existence, depending on the operating agreement. Other than that, the dissolution process is the same for both entities.
If I have registered my company to transact business in other states, do I need to dissolve in those states too?
Yes, if you have registered to transact your business in any other state(s), that is if you are foreign qualified, you need to dissolve your business in your state of incorporation and the state(s) of qualification.
How can we help you in dissolving the business?
At IncParadise, we will complete the dissolution paperwork and deal with the Secretary of State directly. Our professional team has the required experience in filing the dissolutions for companies of all shapes and sizes. First, we will research your filing and identify what it will cost. Also, we will prepare the documents and get them to you for signatures (if necessary). Once you return them to us, we will file the Dissolution with the Secretary of State. The State filing fee is $100 + $89 for us to do the paperwork and filing.
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