How to Dissolve a Company

Businesses close for many reasons. Perhaps the owners are retiring. Or, the company just isn’t doing well enough to justify continuing. Whatever the reason, it’s important to follow your state’s legal procedures for dissolving (ending) the business. Once you’ve formed a business and registered it with the state, you need to formally close it out, even if you never used the business for anything. Failing to do this can subject you to liability for unpaid mandatory business fees and taxes, and possibly leave you vulnerable to lawsuits. This article will provide you with the basics of dissolving a business.

Steps

Preparing for Dissolution

1. Check your organizational documents for dissolution requirements. As a general rule, a corporation's Articles of Incorporation or By-laws will contain information on the procedure for dissolving the company. If the company is an LLC (Limited Liability Company), this information should be in the company’s Operating Agreement.^[1]
   
   
   
2. Look at your state’s business laws regarding dissolution. If your company’s organizational documents don’t reference the dissolution process, or if you simply want additional information on the procedures, then refer to your state’s laws. Most states will have detailed information, as well as forms, in the business section of their official state website.^[2]
3. Hold a meeting to vote on the dissolution authorization. Whether your business is a corporation, LLC, or partnership, you should hold a vote of the shareholders (corporation), members (LLC), or partners to authorize the dissolution. The decision should be followed-up with a written resolution.^[3]
   
   
   
4. Make a list of creditors. Since you’ll have to notify your creditors of your decision to dissolve the company, it’s a good idea to compile this list in advance of the dissolution. Be sure to keep it updated until the dissolution is complete. That way, you’ll lower the risk of missing a creditor when formal notice has to be given. Your list should include:
   • lenders
   • insurers
   • suppliers
   • vendors, and
   • service providers.^[4]
5. Gather at least the last 3 years’ worth of your company’s financial records and tax returns. You should try to have this documentation handy in case it’s needed to prove tax compliance or bill payments during the dissolution process.
   
   
   

Filing for the Dissolution

1. Obtain the necessary dissolution request form. This form can normally be found on your state’s website, or you can request it from the state office of the Secretary of State or Division of Taxation. Depending on your particular state, it may be referred to as a certificate of dissolution, certificate of cancellation, articles of dissolution, or something similar.^[5]
   
   
   
2. Pay the required fee. Most states will charge a fee for filing the dissolution request. This will normally be listed with the dissolution form. These fees vary. For example, New York State charges $60^[6], while Delaware charges $204.^[7]
3. Notify the IRS. There are several things you must do to comply with IRS requirements for dissolving your business. A complete checklist can be found at the IRS website. Some of the items you’ll need to address are:
   
   
   
   • Make final federal tax deposits
   • File final quarterly or annual employment tax form
   • Issue final wage and withholding information to employees
   • Report information from W-2’s issued
   • Report capital gains or losses
   • Report corporate dissolution or liquidation
   • Report information from 1099's issued
   • Report business asset sales
   • Report the sale or exchange of property used in your trade or business
4. Notify your state and local taxing agencies. In addition to the IRS, you’ll have to contact your state taxing authority, as well as any local taxing authorities (for example, county or municipal) to which you pay taxes. Regardless of the fact that you’re dissolving your business, you’re still responsible for being current with all your tax obligations, such as:
   • income tax
   • sales tax, and
   • employment taxes.^[8]
5. Request a tax clearance certificate. In some states, you won’t be able to dissolve your business until you’ve obtained a tax clearance certificate from your state’s Division of Taxation or Secretary of State. (Expect to pay a fee for this document, again depending on your state.) This certificate will confirm that you are up-to-date with all tax payments due the state.^[9]
6. Comply with any applicable “bulk sales law”. This relates to the sale of a company’s assets outside the normal course of business. The purpose of the law is primarily to protect creditors.^[10] Selling off all or most of your business assets falls into this category. Not all states have this law in effect, so you’ll have to check with the state—or your attorney or accountant—to see if the law applies to you. ^[11]
7. Follow up with the state. If you’ve followed all the rules and regulations for dissolution (including submitting the required forms and fee), but haven’t received your filed dissolution certificate after a week or so, be sure to contact the particular department you’ve been dealing with. As with any agency, sometimes things get lost in the shuffle.
   
   
   
8. Cancel any out-of-state registrations. If you’ve registered your company to do business in other states, you’ll have to notify these states of the dissolution. The document you’ll need to file depends on the state, but it will most likely be referred to as an application of withdrawal, termination of registration, or something similar. Again, these forms are probably available on the state's website.^[12]
9. Terminate business licenses and permits. Many times a company will have obtained licenses and/or permits from state or local agencies, in order to conduct business. (For example, a municipal permit to operate a restaurant, or a license from a state Division of Alcohol Beverage Control to sell liquor.) Cancel all such licenses and permits, particularly to prevent another company from trying to use your business account or business name.^[13]

Handling Other Dissolution Tasks

1. Notify creditors. Whether your company is a partnership, LLC, or corporation, you have an obligation to advise your creditors of the dissolution. This not only lets them know what’s happening, it will also provide a deadline for submitting any claims. (This deadline is usually established by state law. A typical period is 120 days.) You should include the following in the notice:
   
   
   
   • The fact that the company is being dissolved
   • A mailing address to send claims, and
   • The deadline to submit claims.^[14]
2. Resolve creditor claims. When your creditors submit their claims, review them to determine whether they’re valid. Pay the legitimate claims as soon as possible. If you believe a claim is incorrect, contact the creditor—in writing—to dispute it, and advise that the claim will be legally disallowed unless the creditor attempts to enforce it before the deadline.^[15]
   
   
   
3. Conclude any leases, loans or contracts that are in effect at the time of your dissolution. You’ll want to bring these to a satisfactory resolution as soon as possible, so as to avoid any lingering issues.
   • Consider bringing your attorney into the discussion if you're meeting with resistance from a lender, or other parties to a contract.
   • With a landlord, you may be liable for additional lease payments, depending on the lease terms. However, landlords do have an obligation to attempt to find another tenant.^[16]
4. Collect money owed to your business. Make sure you follow up with anyone who owes you money. You’ll be hard-pressed to collect anything after your company has been dissolved.
5. Notify your insurance company of any potential claims against the business. Failure to do this could lead to a denial of coverage, and to out-of-pocket liability for the company.^[17]
6. Inform your employees and clients. Your employees should be given an opportunity to prepare for the close of the business. It might be wise to give them their last paycheck and any other money owed (for example, unused vacation compensation) on their last day.^[18] If you have a client-based business, give your clients enough time to arrange for someone else to provide the services or products they were receiving from you.^[19]
7. Sell and distribute your remaining assets. You can do this once you’ve resolved any creditor claims. Your organizational documents should set out how these assets should be divided among the shareholders, members, or partners. If they don't, check your state law to see how distribution should be addressed.^[20]
8. Close out company credit cards and your bank account. Don’t assume that just because you’ve closed the company, a credit card isn’t still valid. Close your bank account once you’ve paid out any claims, and distributed assets.
   
   
   

Tips

• Depending on the size of your business, it might be wise to employ the services of a business lawyer and/or accountant to assist you with the dissolution.
• The dissolution process can take a few months to complete, so keep that in mind when planning to dissolve the business.^[21]
• If you’re a sole proprietor (individual owner) of a business, you may not have to file for a formal dissolution, since you probably didn’t register your business with the state. But it would be a good idea to follow the other recommended steps in this article with regard to closing your business. Additionally, if you were required to register your business name with a department of a state or local government, you can obtain a form from the department to discontinue the business name.^[22]
• In dissolving a partnership, discuss—and make a written memorandum of—the responsibilities of each partner regarding the debts and any future liabilities of the partnership. This is particularly important since normally each partner can be found liable for all the partnership debts.^[23]
• Certain states may require a company to post notice of the intended dissolution in a local or statewide newspaper. This is what’s known as “constructive notice”, and it's an indirect method of notifying creditors. This is normally in addition to—not instead of—direct notification to creditors. Check the state's dissolution instructions to see if this applies to you.^[24]
• Check off the “Final Return” box when filing your final federal and state tax returns. It's usually toward the top of the first page of the return.^[25]
• When sending documents and fees to the state, or notices to creditors, send them certified mail, return receipt requested. That way you have proof that the documents were, in fact, mailed by you.
• In resolving creditor claims, there’s a reasonable chance your creditors may be willing to settle for less than face value, particularly if your company isn't on solid financial ground.
• There’s always the chance a creditor may turn up after dissolution. It’s probably a good idea to keep some money set aside, if possible, to handle a claim if it turns out the creditor didn’t receive notice of the dissolution.^[26]
• If your company’s financial condition is poor, and there’s a chance that your personal assets may be at risk, consider consulting a bankruptcy attorney to see if that option makes more sense than dissolving the company.^[27]
• If you’re in a retail business, notify your existing customers of any going-out-of-business sale. Giving them a priority before opening it up to the general public is a gesture of good will, which will be helpful if you ever decide to open a business in the future.^[28]

Warning

• Be mindful of tax due dates that differ from the normal tax deadlines. For example, a Form 1065 (U.S. Partnership return) must be filed within three months of the closing date when a partnership is terminated. It would be advisable to check with an accountant.^[29]
• If you don’t file a dissolution notice with other states where you’ve registered to do business, you’ll probably still be liable for annual report fees, as well as any minimum mandatory taxes the state may impose on companies doing business there.^[30]

Sources and citations

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