Understanding State Laws for Corporate Dissolution
Understanding state laws for corporate dissolution can be frustrating, to say the least.
Wrapping your head around corporate dissolution can be challenging, especially if you're not acquainted with legal terminology.
To put it in lay terms, think of it as the business world's version of closing up shop, except you’ve got to abide by many rules, regulations, and state-specific guidelines.
Gain a clear understanding of the corporate dissolution process after going through this blog.
What is Corporate Dissolution?
Corporate dissolution refers to the legal process of shutting down a corporation. It includes a series of steps – some of which vary according to state – to terminate a company’s existence, settle all legal and financial obligations, and distribute any remaining assets to shareholders. Corporate dissolution can be either voluntary or involuntary.
Voluntary dissolution: The corporation decides to dissolve typically through a formal decision taken by the board of directors or shareholders. It ceases to exist via collective decision-making.
Involuntary dissolution: Involuntary dissolution of a corporation is when the company is forced to shut down because of factors like violating state or federal laws, failing to maintain corporate status, or a court-ordered dissolution following bankruptcy.
Can a Dissolved Company Still Operate?
Once a company dissolves, it ceases to exist, meaning that the company isn’t recognized by the federal or state government and cannot enter into contracts, conduct business activities, and sue or be sued. If the dissolved company continues to operate, the directors and other employees could become personally liable for the company’s debts and state-imposed fines and penalties.
However, in some jurisdictions, there’s a winding-up period (for a short while after the company dissolves) where the closing company can file or lawsuit or have one filed against it. The winding up period usually ends when all of the company’s assets are distributed to its creditors and shareholders.
How to Dissolve a Corporation?
There is no ‘one’ way to dissolve a corporation. That’s because the exact steps vary from one state to another. However, the following corporate dissolution checklist applies to most tech companies.
1. Hold a Board Meeting
The first step in dissolving a corporation is to hold a formal meeting for the board of directors and shareholders and vote on the dissolution. Typically, the articles of incorporation and local laws require a majority vote to close the company.
Also, document the company dissolution procedure to comply with legal and corporate governance requirements.
2. File the Articles of Dissolution
Once the resolution to dissolve the corporation is passed, the next step is to file the articles of dissolution with the Secretary of State (for the state where the company is incorporated). This is to inform the government that your company intends to close operations.
The articles of dissolution usually contain information like:
The company name
The type of business entity (e.g., corporation, LLC, etc.)
The purpose of the company
The number of authorized shares of stock
The names and addresses of the initial directors and officers
Note: Check out the IRS’ dissolution of business form (also called Form 966) to learn more about the details you’ll need to share with the tax authorities to inform them of the imminent shutdown.
3. Notify Your Creditors
After filing the articles of dissolution, it’s time to notify your creditors and other relevant parties. Doing so allows creditors to make claims against your corporation’s assets and facilitates the payment of outstanding debts.
Notifying creditors via email is common practice, but some states have laws that mandate corporations to publish the news in a local newspaper as well.
4. Pay All Outstanding Debts and Liabilities.
To complete the dissolution process, your corporation must settle all its liabilities, including taxes, wages, and creditor debt. This is a critical step in ensuring your company winds down operations responsibly, fulfills its legal obligations, and protects the interests of shareholders and directors.
5. Distribute Any Remaining Assets
The last step in the corporate dissolution process is to distribute assets among shareholders if any are left after settling the company’s debts and liabilities. Usually, the remaining assets are divided and distributed according to the ownership percentages or other specific agreements contained within the corporation’s bylaws.
Note: These five points constitute a basic startup shutdown checklist and are more for educational purposes. In reality, a proper shutdown plan consists of nearly 100 steps!
What Is the Difference Between a Corporate Dissolution and a Liquidation?
Corporate dissolution is the legal process of ending a corporation’s existence. Liquidation, conversely, involves converting company assets into cash to settle its debts and distributing the remaining amount to shareholders or owners (depending on the circumstances of business closure). Liquidation is often (but not always) the next step after dissolution.
How Long Does It Take To Dissolve a Company?
The time it takes to dissolve a company can range from a few months to a year or more. It depends on factors such as the state in which the company is incorporated, how complex the business structure is, the number of creditors and stakeholders, and whether there are ongoing legal disputes.
From our discussion with startup founders, the average time it takes to shutdown a startup is at least 9 months!
Shutting down is a low point for many tech startup founders. You invested your blood, sweat, and (maybe even) tears to start a business, only to wrap things up a few months or years later.
At SimpleClosure, we know full well the challenges you’re facing, which is why we’ve developed an effective, technology-driven solution that takes the business closure process from months and years down to weeks and even days.
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