April 19, 2014  
 
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Forming a Company

 

Dissolving a Corporation

Dissolution can be more complicated than corporate formation. Here's what you need to know about dissolving a corporation.

Although you might not want to think about it now, sooner or later your company's life will end.
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When that happens, someone is going to have to tie up all the loose ends and fulfill the company's final legal obligations. But how do you do that?

The process for dissolving a company depends a lot on the structure of the business itself. Since corporations involve multiple interests in the form of shareholders, some special handling is required. Even though the specifics of corporate dissolution vary according to the state in which the business was incorporated, here are some of the common questions you'll need to address.

Do I need to officially dissolve my corporation if I no longer do business?

Don't assume that your corporation is finished the moment you get rid of your merchandise and close the doors for the last time. From a legal standpoint, your corporation continues to exist as a business entity regardless of whether or not you are still doing - or have ever done - business. As such, the state continues to expect the corporation to fulfill its legal requirements until such time as it has been officially dissolved.

How do I officially dissolve my corporation?

The first step in officially dissolving a corporation is the adoption of a corporate resolution to dissolve by the board of directors. A vote must be taken and the minutes of the meeting must be recorded.and retained in the corporate records. Once the resolution been approved by the board of directors, it must also be approved by a majority (in some cases two-thirds) of the corporation's shareholders.

Next, the corporation needs to file Articles of Dissolution with the secretary of state. In some states this is done with a simple certificate while others require a more complex process. Once the state has approved the dissolution, the corporation's assets can be distributed to its shareholders.

What happens if I fail to officially dissolve the corporation?

The consequences of not dissolving your corporation can be severe and are not worth taking the necessary steps to make it official. Aside from a lack of corporate closure, some of the consequences you may be forced to deal with include the following:

  • Tax Filings. Until the corporation is formally dissolved, it will continue to be required to file all relevant federal, state, and municipal tax reports. Failure to do so will result in the normal penalties and fees associated with a late filing.
  • Personal Liability. Since the business is still considered a legally viable entity, its officers, directors, and shareholders may be personally liable for the corporation, even if it is no longer doing business.
  • Annual Reports. Your corporation will need to file annual reports every year (and pay the penalties for neglecting to file them) until the corporation is dissolved.
  • Future Product Liability. A corporation that has not been officially dissolved continues to risk future product liability from the products it sold while it was in operation.
  • Asset Allocation Delay. Shareholders are not legally entitled to their share of the corporation's assets until it has been officially dissolved with the secretary of state.

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Conversation Board

We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.

Valerie Ludwig 10/8/2008

I found this article very much to the point - no extra fluff, just clear directions to follow. The information provided will be quite helpful in the beginning process of closing our corporation. Thank you.

Elisha Prero, attorney at law 4/20/2009

In most - perhaps all - jurisdictions, it is not the case that "Since the business is still considered a legally viable entity, its officers, directors, and shareholders may be personally liable for the corporation, even if it is no longer doing business." The opposite is usually the case. So long as a corporation continues to exist, its officers, directors, and shareholders will generally NOT be liable for the corporation. If a corporation is dissolved, there is greater exposure. This is one reason that attorneys may recommend to their clients NOT to dissolve a corporation until they are pretty darn certain all the dust has settled. Also, it is frequently the case that is you simply do nothing (including not filing annual reports) that the secretary of state will dissolve your corporaton for you with little adverse consequences.

vetlover 8/18/2010

We have officially disolved our construction corporation and have received confirmation from the state of Iowa. Our corporation owned many tools and equipment. Is there a way to sell this equipment without personal tax consequences?

dhwco 9/2/2010

vetlover - I am not an attorney but it sounds like you already have tax consequences. If you received the assets from the company, that is already income, the only thing to determine is the amount and a sale may be the only way to reliably do that w/o arguments with the IRS.

Newbi 1/10/2011

Dad passed leaving corp. He was sole shareholder. Any way to dissolve without assuming liability myself?


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