Updated March 2, 2021
How to Dissolve a Corporation
Corporations are formed and dissolved according to state law. Most of the information related to how to dissolve a corporation can be obtained from the Secretary of State’s office for the state in which the corporation was formed. This article discusses the steps required for dissolving a corporation.
How to Dissolve a Corporation in 9 Easy Steps
1: Hold a Board Meeting and Seek Shareholder Approval
2: File a Certificate of Dissolution with the Secretary of State
3: Notify the Internal Revenue Service and Other Taxing Authorities
4: Formal Notice of Dissolution
5: Settle Claims with Creditors
6: Liquidate All Assets
7: Distribute Funds to Shareholders
8: Close All Accounts
9: File Company Tax Returns and Tax Documents
In most states, corporations in good standing may remain in existence perpetually until they are formally dissolved provided the corporations remain in good standing with the state. Because remaining in good standing could require owners to take steps each year to comply with state laws for corporations, it is typically best to learn how to dissolve a corporation that is no longer conducting business.
Do I Have to Formally Dissolve My Corporation?
Company owners may believe it is easier and less costly to allow a corporation, including an S corporation, to remain inactive instead of learning how to dissolve a corporation. The definition of an inactive corporation varies slightly by state. However, most states consider a corporation inactive when the corporation is no longer conducting business by offering services, entering purchase and sales agreements, entering new contracts, owning property within the state, and having no employees.
Can a corporation stay inactive or does it have to be dissolved?
An inactive corporation may remain registered with the state as long as the corporation remains in good standing. To remain in good standing, the corporation must continue to file required annual reports and pay annual business taxes. Other requirements to remain in good standing are state-specific. Researching the required actions to remain in good standing and taking those actions each year could be more costly and time-consuming than dissolving the corporation.
What are the consequences of not dissolving a corporation?
There can be consequences for choosing to allow the corporation to remain inactive. In some states, a corporation could face penalties if it remains inactive and does not remain in good standing. If the state administratively dissolves the corporation, owners could be personally liable for any outstanding debts and liabilities. Furthermore, additional penalties and interest on accrued taxes could become the liability of the owners once the state dissolves the corporation.
Because there could be significant liability for owners who allow a business to become inactive, it is typically best to learn how to dissolve a corporation and follow through with the dissolution. There could be a few instances in which it might be best to allow the corporation to remain inactive for a short period. If owners have questions about whether it is best to move forward with the corporate dissolution or allow the company to remain inactive, it’s wise to get help from an experienced corporate law or business law attorney.
Many factors impact the time it takes to dissolve a corporation. Larger corporations may take much longer to dissolve than smaller corporations. The type of business the corporation conducts may impact the dissolution timeline, as does state and federal regulations for closing certain businesses. Business law attorneys are often helpful because they understand how to dissolve a corporation and move through each step efficiently to avoid unnecessary delays and problems.
How to Dissolve a Corporation in 9 Easy Steps
It can take just a few days to formalize the corporate dissolution with the state once the company files the Certificate of Dissolution and pays the filing fee. However, the process of completing each of the steps involved in the decision to close a business, cease operations, liquidate assets, and file final tax returns and other required documents may take several months.
Step 1: Hold a Board Meeting and Seek Shareholder Approval
The first step in dissolving a corporation is to obtain the required permissions. Most corporate bylaws outline the procedures that must be followed to dissolve the corporation. Additionally, some states may have requirements and laws that dictate how to dissolve a corporation.
Typically, the Board of Directors holds a meeting to introduce and vote on a resolution to dissolve the corporation. Once the Board of Directors has approved the dissolution resolution, shareholders vote for or against the resolution. In most cases, a simple majority vote is sufficient to pass the resolution for corporate dissolution. The Board needs to develop a plan of dissolution once the shareholders approve the dissolution.
What happens to a shareholder in a dissolved corporation?
In a voluntary corporation dissolution, the shareholders should receive a final dividend payment, if there is any money remaining after all debts and liabilities are satisfied. If the corporation does not pay all debts in full but disburses funds or assets to shareholders, the shareholders could be liable for those debts if the creditors file a lawsuit.
If the company is subject to an involuntary dissolution by the court or administratively dissolved by the state, shareholders could incur expenses and liabilities. It is best to end a business through an official dissolution of corporation to protect shareholders from future liability.
Step 2: File a Certificate of Dissolution with the Secretary of State
Once the Board of Directors and shareholders have approved the corporate dissolution, the Certificate of Dissolution must be prepared and filed with the appropriate state office. The Certificate of Dissolution is the formal notice to the public and the government that the company is being dissolved.
How much does it cost to file the articles of dissolution?
The fee for filing a Certificate of Dissolution or Articles of Dissolution varies by state. Most state offices provide the dissolution form that includes instructions for completing and filing the dissolution form in addition to the fees that must be paid.
Step 3: Notify the Internal Revenue Service and Other Taxing Authorities
You must notify the Internal Revenue Service and other taxing authorities that the corporation is being dissolved. The corporation is also required to file a final annual tax return for the tax year the business is dissolved, as well as any other required tax forms. The Internal Revenue Service provides a checklist of requirements for dissolving the corporation. Most corporations retain corporate law attorneys, tax professionals, and accountants to ensure that nothing is overlooked.
What happens if a corporation dissolves and still owes a tax debt?
If the corporation has remaining assets that have not been liquidated or transferred, the government could seize these assets for payment of taxes, penalties, and interest. If individuals attempt to dissolve a corporation and dispose of assets in an attempt to avoid paying taxes, those individuals could be held legally liable for the taxes and other penalties.
Step 4: Formal Notice of Dissolution
Creditors and other parties in interest must be notified of the corporation dissolution. In most cases, the company mails notices of dissolution to creditors with directions for submitting final claims for payment. In addition to mailing the required notices, some companies publish the Notice of Dissolution. State laws vary regarding proper notification and whether certain claims may be barred after the deadline for submitting claims. When in doubt, it is best to consult an attorney to ensure that all steps are taken to eliminate liability for the corporate shareholders, board members, officers, and employees.
Step 5: Settle Claims with Creditors
The claims filed by creditors may be accepted and paid by the corporation or disputed by the company. If the corporation disputes a claim, the creditor may choose to file a lawsuit to collect the debt. The corporation may choose to settle disputed debts for less than is owed on the account to avoid costly and lengthy litigation that could prevent the finalization of the dissolution. A business attorney can guide the officers and board members through the process of settling creditor’s claims according to state and federal laws.
Step 6: Liquidate All Assets
After payment of corporate debts, the remaining corporate assets should be liquidated for distribution to the shareholders. The board members may authorize a variety of methods for liquidating corporate assets, such as discount sales and auctions. Thorough records are required for all transactions to prove that the officers and board members took reasonable steps to obtain the highest values for the corporate assets.
Step 7: Distribute Funds to Shareholders
The corporate bylaws should explain the procedure for distributing final funds to shareholders. Typically, shareholders receive a percentage of the remaining assets based on the percentage of stock owned. For instance, if a person owns 20 percent of the corporate stock, that person should receive 20 percent of the final distribution of assets. However, if the corporation has multiple stock classes, the corporate officers and the Board of Directors must carefully follow the bylaws to ensure shareholders receive the correct distribution based on the class of issued shares they own.
Step 8: Close All Accounts
Once all assets are distributed, corporate officers and board members need to complete a final accounting to ensure all corporate books are balanced and zeroed out. At this point, the corporate bank accounts can be closed.
Step 9: File Company Tax Returns and Tax Documents
The final corporate tax return may now be filed, along with any other tax forms that have not been filed to date. Many corporations allow their tax professionals and accountants to prepare and file the final tax returns with the IRS and other taxing authorities to decrease the chance that something is overlooked. A skilled tax attorney will prevent any mistakes that could cause problems for board members, officers, and shareholders after the corporation is dissolved.
Can I Reinstate My Corporation?
If the corporation was dissolved voluntarily, the business entity is no longer active. Owners would need to file new Articles of Incorporation to begin a new company. However, if a corporation was subject to an involuntary dissolution or administratively dissolved, the owners may be able to reinstate the entity.
Reinstating a corporation refers to bringing the corporation into good standing. Corporations that are inactive, but remain in good standing, should be able to resume business at any time they desire. However, if a business is inactive and not in good standing, the corporation must take all necessary steps to bring the company back to good standing.
Requirements to reinstate a corporation may include filing annual returns, payment of outstanding fees and taxes, and filing a reinstatement application. The process varies by state; check with the corporate division of the Secretary of State’s website to determine the exact requirements to reinstate a corporation.
How to Dissolve a Corporation
It is better to learn how to dissolve a corporation correctly instead of allowing the state or the court to force the corporate dissolution. Taking the proper steps to dissolve a business can prevent future tax liability and legal trouble for officers, board members, and shareholders. However, if you believe you may want to continue business in the future, you may allow the corporation to become inactive but remain in good standing.
Deciding between inactive status or dissolution can be complicated. The process of dissolving a corporation can be overwhelming depending on the size of the corporation, financial and tax obligations, and other circumstances surrounding the business closing.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
Additional Resources:
3 Steps to Create an Invisible Investor Strategy
The greatest mistake that people make when it comes to asset protection for real estate is not understanding the risks that are waiting out there for them. This eBook reveals the structure you should follow to ensure your hard earned money is protected from frivolous lawsuits and costly tax mistakes.
