Involuntary Dissolution: Everything You Need to Know
A company may face involuntary dissolution in the event of a serious disagreement with shareholders over whether or not it should be dissolved. 3 min read
A company may face involuntary dissolution in the event of a serious disagreement with shareholders over whether or not it should be dissolved. It may also be the result of bankruptcy, failure to file reports with the state, failure to pay taxes, or other irreparable conditions.
Why a Corporation May be Ordered to Dissolve
A corporate dissolution may be ordered by the Court of Common Pleas to protect shareholders' investments. This may happen when three conditions exist:
- The directors of the company have engaged in illegal or fraudulent activities.
- Assets of the company have been spent unwisely or otherwise wasted.
- There is a deadlock among the directors of the company regarding a major decision, and they are unable to resolve it.
Along with a court-ordered dissolution, a company's creditors may also arrange for a corporation's dissolution to recover money they are owed.
The state where the corporation is formed can revoke or inactivate a corporation instead of ordering dissolution. The reasons for doing this include:
- The company has failed to file required forms or reports, most commonly the annual report that must be filed with the Secretary of State.
- The company has failed to file tax returns or pay its taxes.
- The company has failed to keep a registered agent or registered office; this often happens when the registered agent resigns because of non-payment by the company.
If this happens, companies may simply allow their registration to lapse rather than pay legal fees and filing expenses to officially dissolve. If this happens, dire consequences can result, such as cancellation of bank loans. The company may be vulnerable to litigation with no legal protection for the owners. Also, in many states, unpaid taxes continue to add up.
Corporations that do not officially dissolve also leave themselves vulnerable to corporate identity theft, which happens when an individual fraudulently reinstates a revoked entity and uses it for its own illegal purposes. This can happen when the company's owners stop keeping track of the company's information and how it is used.
Can You Stop an Involuntary Dissolution?
The only way to stop the involuntary dissolution of a company is to fix the problems that led to it in the first place. The two reasons it happens is by order of the Secretary of State due to improper maintenance, known as “quo warranto,” and by court order due to fraud or insolvency.
To address the problem of improper maintenance, make sure to hold annual meetings, keep accurate corporate records, make sure income statements are correctly prepared, and file annual reports as required.
If the company faces involuntary dissolution due to insolvency, eliminate debts by refinancing or selling assets. If it has been ordered by the court or Secretary of State, the company will need to provide documentation that proves the insolvency has been addressed, debts are no longer in arrears, and it is unlikely to happen again.
All shareholders must be contacted regarding the involuntary dissolution, and all of the steps being taken to resolve the issues.
Involuntary Dissolution Resulting from Shareholder Disputes
Occasionally a company's shareholders have major disagreements regarding the management of the company. This can happen between owners of a partnership, or between minority and majority shareholders as well. When there is a deadlock between company owners and shareholders, involuntary dissolution is the last step that can be taken to resolve things.
When all else fails, a court will force a sale of ownership from one partner to another, or the sale of the business entirely. If this is a possibility, you'll need to check your buy-sell agreement or shareholders' agreement; it may have provisions that address how the dispute is handled. You'll also want to exhaust every other option for settling the dispute before taking it to court. This may be done through mediation by a third party.
If a judge orders dissolution of the company, the assets will be liquidated according to the court's rules. It may be sold entirely as one business or sold in parts. It may also award buy-out rights, which allows majority shareholders to buy out the shares of the minority; this avoids dissolution of the company.
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