Voluntary Dissolution: Everything You Need to Know
Dissolving an LLC is easier than dissolving a corporation, but following business-closing procedures is still essential nonetheless.3 min read
Voluntary dissolution is when you dissolve a corporation or LLC. Dissolving an LLC is easier than dissolving a corporation, but following business-closing procedures is still essential nonetheless. It requires minimal paperwork to dissolve an LLC. Beware, though: if you do not notify your creditors and handle the closeout properly, you could be held personally for business debt.
Voluntary Dissolution Law and Legal Definition
When a corporation's board of directors or an LLC's members decide to dissolve a corporation without any mandate, it is called voluntary dissolution. The stockholders must vote in favor of the dissolution. If the board of directs want to dissolve the corporation, then they need a certain number of the stockholders to agree. Check with your Secretary of State for dissolution instructions.
For instance, if a federal saving association wants to dissolve their organization, the must do the following:
- Give notice to the Federal Deposit Insurance Corporation (FDIC) regarding the reason the corporation is dissolving.
- Transfer all assets to another association under Federal or State charter to make sure they there is enough money to take care of all the obligations.
- Follow the proposed dissolution process proposed by the board of directors, which should keep all affected parties' best interests in mind.
Reasons for Voluntary Dissolution
Once an LLC is formed, the business continues to exist unless its members voluntarily dissolve it or the courts involuntarily shut it down. There are several reasons members may decide to dissolve an LLC.
- The business is consistently operating at a loss, and the members can no longer afford to invest in it. Not all members may not want to dissolve the company; however, depending on the articles of organization, LLC bylaws, and the state legislature, you may not need a unanimous vote in this case.
- The LLC may have been formed with a planned expiration date. The expiration can be either a specific date or event. Usually, you must file a form. Check with your state's Secretary of State to find out the process in your jurisdiction.
- Sometimes a business forms for a project or temporary endeavor.
- When members disagree on critical decisions such as working hours, distributing profits, or the business direction, they should dissolve the company. While a member can sue to dissolve the LLC, it is not in any member's best interest.
- An LLC's bylaws include dissolution events such as a member's death.
- The business growth is stagnant. If a business is not growing or profiting as well as the members envisioned, they may want to dissolve the company.
The reason you want to dissolve your company does not matter as much as taking the steps necessary to terminate it. Most states require a simple document stating you intend to dissolve your LLC. You must also tie up all loose affairs, like liquidating the assets and paying all your creditors in full. Take caution: if you do not close out correctly, you can become personally liable to any remaining creditors.
Voluntary Dissolution vs. Judicial Dissolution
You can dissolve a corporation either non-judiciously or judiciously. Article 10 of the Business Corporation Law (BCL) outlines how to end a business voluntarily (or non-judiciously). Corporations formed after February 22, 1998, require a majority vote from the shareholders to file a certificate of dissolution. On the other hand, corporations formed before that date need a two-thirds vote to submit a certificate of dissolution, unless the shareholders approve a majority vote.
BCL Article 11 regulates judicial dissolutions. Section 1104 allows a 50-percent shareholder vote to seek a court order to dissolve a corporation if the there is a deadlock and “internal dissension.” Section 1104-b allows 20 percent or more of the shareholders to file for a judicial dissolution if the shareholders in control are doing something illegal, immoral, or wasteful with the corporate assets.
It is better to end a corporation voluntarily instead of by petitioning the courts. LLC members should define dissolution events within their operating agreement. This minimizes confusion and establishes a process that will reduce the chances that you need to take your fellow members to court. When creating an LLC, seek legal advice to help you cover critical events in your agreement.
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