As the year ends, you may have reached the conclusion that your business didn’t meet your expectations, financially or personally. Businesses dissolve for a variety of reasons, and not all of them are necessarily negative. Letting go of a business that doesn’t fulfill the goals you set for becoming a small business entrepreneur can allow you to start a new business with a clean slate—provided that you properly dissolve the business ceasing operations.
If you are wrapping up your operations, must you go through the process or dissolving your corporation or limited liability company (LLC) with the state? The answer is an unqualified “yes.”
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 will be remain subject to corporation 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, which may extend to you personally.
Warning
Involuntary or administrative dissolution of an entity can also occur for a variety of reasons, among the most common being the failure to file an annual report or properly maintain a registered agent for service of process. Outsourcing these tasks to a company that specializes in entity compliance, such as BizFilings, ensures that your company is not forced to dissolve due to an inadvertent oversight, as well as avoiding the cost and hassle of attempting reinstatement.
Each state has its own laws governing dissolution, but there are general guidelines encompassed by most state statutes that apply to both corporations and LLCs. The proper filings are required for each state in which your business will cease to exist. This includes your “home state”—your state of incorporation or organization—as well as any “foreign” states in which you are qualified to do business.
Dissolution is a multi-step process involving a flurry of paperwork, often including sometimes interdependent filings of dissolution documents with the state, as well as federal, state and local tax forms, and finally notifying creditors and settling claims.
Owner approval is the first step
A corporate or LLC dissolution generally requires that the shareholders or members approve the dissolution. Corporate bylaws or the LLC’s operating agreement routinely spell out the process for dissolving, including shareholder and member approvals needed, in accordance with applicable statutes.
Tip
For corporations, the board of directors should draft and approve the resolution to dissolve. Then, if necessary, shareholders vote on the resolution, and both actions are documented in the corporation’s record book.
LLCs aren’t required to follow the same procedures as corporations, but best practices dictate that the decision to dissolve and the members' approval be documented.
