Updated October 29, 2020:

A board of directors resolution to dissolve corporation business may be done for a variety of reasons, such as retirement, a change in career direction, the company no longer serving its purpose for the owners, or bankruptcy.

Overview of Voluntary Dissolution

When a corporation is no longer doing business, the dissolution of the business must follow the legal steps that the state requires. Since it is an entity created under state authority, only the state can terminate the business.

Each state has its own laws regarding the legal dissolution of an entity. Note that dissolving a corporation requires formal action. It cannot be dissolved with a phone call or letter.

A corporation must attain a Certificate of Dissolution from the office of the Secretary of State where the business was registered. If not, the corporation is responsible for taxes, assessments, penalties, and interest. The certificate requires the corporation name; the date the dissolution was authorized; a statement noting the authorization of the corporation by the stockholders and board of directors; the name and address information of the officers and directors; and the original filing of the corporation's Certificate of Incorporation with the Secretary of State.

When dissolving a corporation, it is recommended that professional accountants, tax experts, and lawyers be involved in the process. This helps ensure all obligations to employees, directors and officers, creditors, and taxing authorities are taken care of.

Dissolution of a corporation is complicated. The entity is not considered dissolved until the following steps are completed:

  • Formal action to dissolve the business takes place.
  • State offices are duly notified by filing the intent to dissolve the business.
  • Creditors must receive a statutory notice.
  • All creditor claims must be processed.
  • All remaining assets must be sold and distributed.

There are also actions that must be taken at the state and federal levels before a dissolution takes place. These are steps that an accountant typically handles.

Federal

  • Final federal tax deposits must be made.
  • Capital gains and losses must be reported.
  • Shares held by partners/shareholders must also be reported.
  • A federal tax return must be filed with the Internal Revenue Service for the year the corporation goes out of business. The return must be marked "FINAL."

State

  • If required, a final state tax return must be filed.
  • Final state tax deposits must be made.
  • A final sales tax return must be filed, if applicable.
  • Final employment tax returns must be filed for employees, if applicable.
  • A final annual or quarterly employment tax form must be filed.

Employees

Along with employment tax returns and quarterly or annual employment tax forms being filed, there are several other required steps.

  • Employees must be issued wage and withholding information.
  • Information for W2s issued must be reported.
  • A return filed for tip income and allocated tips.
  • Final employee pension and benefit information must be filed.
  • Sub-contractors must receive payment information.
  • 1099 information must be reported.

Process for Dissolving a Corporation

When the dissolution of a corporation is on the itinerary, the first thing that is generally done is holding a meeting of the board of directors. At the meeting, the members propose a resolution to close the business. This is called a termination proposal.

All stockholders who are entitled to vote must receive 10 days prior notice. A majority of the outstanding stock must approve the dissolution followed by a majority of the shareholders.

Under the General Corporation Law, a formal stockholder meeting does not have to take place for stockholders entitled to vote on the dissolution if each one provides their written consent.

Dissolution of a corporation based on written consent can be a more efficient process for smaller businesses. This may be because most or all stockholders who are voting are directors and either a unanimous or a majority agreement is in place.

The laws for dissolution vary by state. In some states, a minimum two-thirds of all voting shares must be in agreement to approve a corporate dissolution.

In many states, the corporation must file a statement of intent to dissolve before steps can be taken to initiate the closing of the business.

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