What should be done to dissolve a business?

3. What Does Dissolution of a Business Mean?

Dissolution of a business can occur for various reasons. It may be initiated involuntarily by the state administrator overseeing business entities, which could happen due to the failure to meet certain obligations like filing annual reports, paying state taxes, or maintaining a registered agent or office. This is often referred to as administrative dissolution.

On the other hand, a business can also undergo a voluntary dissolution process when the business owners decide it's time to close shop. Voluntarily dissolving your business involves filing Articles of Dissolution, effectively terminating the existence of your LLC or corporation in your state of incorporation or formation, or in your state of qualification if you were operating in another state.

4. What Happens if You Don't Dissolve Your Business?

Businesses incorporated or qualified in a state are subject to annual report and tax obligations in that state. If you fail to properly dissolve your business, it will continue to exist as a legal entity, and its obligations will persist. This may result in accumulating late fees and penalties, and it could also make your business susceptible to forms of business fraud, such as business identity theft.

Now, let's dive into the seven crucial steps to ensure a smooth dissolution of your corporation or LLC.

Step 1: Get Approval of the Owners

The first step in closing your business is to secure the approval of the company's owners. In the case of a corporation, this involves the shareholders giving their consent. For LLCs, it's the members who grant approval.

In many small businesses, shareholders or members are often intimately involved in the daily operations and are well aware of the reasons for closing the business. Corporate bylaws or the LLC operating agreement usually outline the dissolution process and the necessary approvals. To comply with corporate formalities, the board of directors should draft and approve the resolution to dissolve, which is then voted on by the shareholders. For LLCs, although they are not subject to the same formalities, it is advisable to document the decision and member approval.

Step 2: File the Certificate of Dissolution with the State

Once the owners have approved the dissolution, you'll need to file the Certificate of Dissolution with the state where your corporation or LLC was formed. If your business was qualified to operate in other states, you'll also need to file the necessary paperwork in those states.

The process for filing the Certificate of Dissolution can vary by state. Some states require this filing before notifying creditors and resolving claims, while others require it afterward. If your organization is a nonprofit, you may need to obtain approval from the state's Attorney General. In certain cases, the state may require tax clearance before you can file the Certificate of Dissolution, and any outstanding taxes must be settled.

Step 3: File Federal, State, and Local Tax Forms

Closing your business doesn't mean your tax obligations cease immediately. You must finalize the closing process with the IRS, as well as your state and local taxing agencies. The IRS provides a business closing checklist on its website, outlining the required forms and links to additional state and local requirements. Don't forget about payroll reporting obligations if you have employees; consult your accountant or tax adviser for specific guidance.

Step 4: Wind Up Affairs

After obtaining approval and filing the necessary documents, your corporation or LLC must begin winding up its affairs. This includes:

• Settling debts
• Notifying customers, suppliers, landlords, insurers, and vendors
• Informing employees
• Canceling licenses, permits, and registrations
• Withdrawing from states where the business was qualified

It's important to note that a dissolved business cannot continue to operate except for actions necessary to finalize its affairs and liquidate its assets.

Step 5: Notify Creditors Your Business is Closing

You are legally obligated to notify all your company's creditors by mail, explaining that your corporation or LLC has been dissolved or has filed the statement of intent to dissolve. The notification should include:

• The mailing address to which creditors must send their claims
• A list of the information that should be included in the claim
• The deadline for submitting claims (often 120 days from the date of the notice)
• A statement that claims will be barred if not received by the deadline

In some cases, your state may allow claims from creditors who were not known to the company at the time of dissolution. If you're uncertain about your state's requirements, it's a good idea to consult with an attorney.

Step 6: Settle Creditors' Claims

Your company has the option to accept or reject creditor claims. Accepted claims must be paid or suitable arrangements must be made with creditors, often involving negotiated settlements. With rejected claims, you must inform creditors in writing. It's advisable to seek legal counsel to navigate this process and understand your state's relevant statutes.

Step 7: Distribute Remaining Assets

After settling creditor claims, the remaining assets can be distributed to the company's owners. Typically, assets are allocated based on the shareholders' or members' ownership percentages. This process should be reported to the IRS. Corporate bylaws or the LLC operating agreement usually outline the procedure for distributing assets among shareholders or members. If you have concerns about distribution or ongoing contingent liabilities, it's essential to consult an accountant or tax adviser.

5. A Note About "Canceling" Your EIN

It's a common misconception that you can simply cancel or close your Employer Identification Number (EIN) when dissolving your business. However, the IRS doesn't cancel EINs. Once assigned to your business, the EIN becomes the permanent federal taxpayer identification number for that entity.

You can close your business account with the IRS by submitting a letter containing the required information, including the complete legal name of the entity, the EIN, business address, and the reason for closing the account. If available, you can also enclose a copy of the EIN Assignment Notice that was provided when your EIN was initially assigned. Remember that the EIN remains associated with your business and can be used at a later date if necessary.

6. Conclusion

Closing a business is a complex process, but by following these seven essential steps, you can ensure a smooth and legally compliant dissolution of your corporation or LLC. Seek professional guidance if needed to navigate the intricacies of closing your business, and always ensure that you fulfill your legal and financial obligations.

Q&A

Question 1: What does it mean to dissolve a business?

Answer 1: Dissolving a business means permanently closing and terminating its operations. It involves settling financial obligations, notifying relevant authorities, distributing assets, and discontinuing all business activities.

Question 2: What are the common reasons for business dissolution?

Answer 2: Common reasons for business dissolution include financial difficulties, changes in business objectives, retirement of the owner, partnership disputes, loss of market viability, and compliance issues.

Question 3: What legal and procedural steps are typically involved in the dissolution of a business?

Answer 3: Legal and procedural steps for business dissolution often include notifying government agencies, settling outstanding debts and taxes, filing dissolution paperwork, distributing assets to stakeholders, and complying with local regulations.

Question 4: How does business dissolution affect the owners and stakeholders of the company?

Answer 4: Business dissolution can impact owners and stakeholders by releasing them from ongoing business responsibilities, settling financial matters, and distributing any remaining assets. The specific impact varies depending on the nature of the business and the terms of dissolution.