Voluntary Dissolution of Corporation
Voluntary dissolution of corporation happens when a corporation stops serving its intended purpose, so the shareholders agree to willingly dissolve it.3 min read
Voluntary dissolution of corporation happens when a corporation stops serving its intended purpose, so the shareholders agree to willingly dissolve it. There are three main steps involved in a voluntary dissolution of a corporation:
- Filing the document to dissolve the corporation with the state
- Wrapping up operations of the business
- Liquidating and then distributing the assets of the corporation to the shareholders
The procedure to end the business entity's existence is called dissolution. The entity can be dissolved before, during, or after the liquidation process. Settling outstanding debts and any claims against the corporation is an important part of wrapping up business operations for a corporation that's being dissolved. This includes paying fees and taxes the corporation owes to all government agencies. Under state laws, creditors can usually sue shareholders if they don't pay the corporation's debt before distributing liquidated assets, which is wrongful distribution.
As an example, in Delaware, creditors have three years to sue after a corporation is dissolved, and in California, the statute of limitations is four years. If business operations aren't properly wound up, it can come back on shareholders. Most of the time, shareholders are only liable for corporate assets they receive as distributions. However, if the shareholder also works for the corporation as an officer or director, he or she can be held personally liable for tax and payroll obligations.
Shares or No Shares
Two approaches are possible with a voluntary dissolution. The one chosen depends on whether the corporation has issued shares or if no shares have been issued. If shares have been issued, the dissolution must be approved by shareholders before it can proceed. If no shares have been issued, the incorporators and directors can go ahead with the dissolution.
Articles of Dissolution
Delivering the Articles of Dissolution to the Department of State Corporations Division for filing dissolves the corporation. After the corporation is dissolved, it can only keep doing business in order to wrap up and liquidate the corporation's assets. When the Articles of Dissolution are filed, the corporation then has to provide a written notice of the dissolution to each entity that has a claim against it. The written notice must contain certain facts, including:
- A summary of the claimant's potential claim.
- A statement about whether the claim is admitted or not and the amount that's admitted if it is as of a specific date. Interest obligations must also be noted if attached to a debt instrument.
- A mailing address the claimant can write to if choosing to file a claim.
- A deadline for filing the claim. This must be at least 120 days after the date the notice is sent.
- An announcement that no further notice is required by the corporation before making distributions to other claimants, shareholders, and anyone else with an interest in the corporation's assets.
Directors aren't typically held personally liable for the dissolved corporation's debts as long as all procedures are followed carefully, and the corporation has been thoroughly wound up. If the assets of the dissolved corporation are improperly distributed in a manner that's detrimental to a creditor, that can be considered fraudulent, and the directors may then be held individually liable.
The procedure to dissolve an LLC is a little different, but the final result is the same as a corporate dissolution. A series of triggering events must happen to dissolve an LLC. The events required to trigger an LLC's dissolution include:
- Establishing a date in the Articles of Organization.
- Each of the LLC members' written consent or a court's order to dissolve.
- Finally, the LLC must file Articles of Dissolution.
The LLC must include a financial status statement in its Articles of Dissolution. The statement must note whether the LLC's debts have been paid or discharged. It also has to include information on outstanding obligations, liabilities, and any property or assets still owned by the LLC or distributed among the members of the LLC according to each one's invested rights and interest share. The state then issues a certificate of dissolution that ends the LLC, and the LLC may then only perform the duties associated with winding up the business and liquidating its assets.
If you need help with the voluntary dissolution of a corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.