Steps to Dissolve a Corporation: Everything You Need to Know
Taking the proper steps to dissolve a corporation can save you from legal and financial consequences. 3 min read
Taking the proper steps to dissolve a corporation can save you from legal and financial consequences. Just as you take official steps to create your business entity, you must also follow the established state procedure to disband it.
Preparing to dissolve a corporation involves the following steps.
- Prior to filing official dissolution paperwork, make moves to get your business affairs in order. You may have to buy vendors out of existing contracts. It's generous to give employees notice so they can seek new opportunities.
- Review your property lease to fulfill the requirements of vacating the building. Examine contracts with clients and do as much as possible to fulfill those contracts before closing. If you are unable to do so, you will need to void, amend, or transfer the contract.
- Determine what your final tax payment will be, as you'll need to settle this amount before the business can be officially dissolved.
- If you don't already have a buy-sell agreement in place, creating one can establish provisions for dissolving the corporation. This is especially important when the business has more than one owner.
Voting to Dissolve the Business
If a buy-sell agreement or other dissolution procedures are included in your company's organizational documents, follow these when dissolving the business. Otherwise, default to the laws of your state. These commonly require a formal vote at a meeting of the board of directors. The vote must be recorded in the meeting minutes.
If you have shareholders, you may also need majority shareholder approval to dissolve the business. In most cases, at least a two-thirds vote is required. However, this varies by state. Following guidelines carefully can help prevent disputes in the future.
Filing Paperwork With the State
Most states require corporations to file Articles of Dissolution or a Certificate of Dissolution. Requirements vary on whether you need to inform creditors of your closing before or after you file this certificate. You'll also need to pay your creditors in full, arrange for settlement of your debt, or file bankruptcy. Many states require you to pay all back taxes before dissolving your business.
Notifying Official Agencies
You'll need to take steps to close your business with the IRS. These include:
- Paying all taxes for the current year as well as any past-due taxes
- Continuing payroll reporting obligations and deductions
- Filing liquidations and capital gains forms
- Filing quarterly or annual taxes
- Completing final tax forms
- Settling outstanding payroll tax
- Filing Form 1065 within three months of dissolving the business
All final tax returns and paperwork should be marked as such and may need to be provided to the secretary of state with your dissolution paperwork.
In addition to the IRS and state and local tax agencies, you'll need to cancel your business permits and licenses. This prevents others from using your name or account to run a business without your knowledge.
Notifying Creditors and Settling Debts
When you dissolve your business, you are required by law to inform creditors of your intention to do so. This notification must include the address to which they can send outstanding claims and a deadline to do so. In some states, you might also be required to place a newspaper ad with this information.
You can either accept or reject creditor claims you receive. Valid claims must be repaid or settled for an agreed-upon amount, such as a percentage of the total contract. To reject a claim, you must do so in writing.
Collecting Outstanding Debts
In addition to settling your outstanding debts, this is the time to collect money owed to the company. You do not need to inform your debtors that you are closing the business. It will be much easier to collect outstanding debts while your business still exists.
Distributing Remaining Assets
When your creditors have been paid, any remaining assets can be distributed to shareholders in the same proportion of their stakes in the business. Companies with multiple stock classes should follow their bylaws when it comes to distributing assets.
Once assets are distributed, you should close your business bank accounts and credit lines. You may also want to meet with an attorney to ensure you've taken all the necessary steps to dissolve your business.
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