Companies and BusinessHow To Dissolve A Business Or Corporation – 7 Easy Steps

May 6, 20200

How to dissolve a business?

Before I go to explain the steps to dissolve a business or corporation.

You must know the ways for the dissolution of your company.

In the last part of this article I have explained these seven steps.

Make sure you will check it out.

The four ways to dissolve a business.

  1.     Voluntarily Dissolving a business
  2.     Involuntarily dissolving a business
  3.     Dissolving a business by secretary of the state
  4.     Dissolution through court of law.

Welcome to learn about dissolution of business.

I’m gonna talk about how to dissolve a business.

Why should you dissolve a business?

And,

What is the difference between involuntarily dissolving a business and voluntarily dissolving a business?

The difference between voluntary dissolution and involuntary dissolution of business can be involuntarily dissolved by a court order if creditors filed suit against the business or the corporation.

If the business fails to file its annual report then it can be dissolved by the secretary of state.

If the business is involuntarily dissolved then any creditors seeking that have business debts can pursue the directors and officers of the company after the dissolution of business for personally.

They’ll basically make the directors and officers personally liable for business debts.

If the business is improperly or involuntarily dissolved by consent of the shareholders or a shareholder vote and properly wound up that means concluding the corporate business.

We’ll talk about

What winding up is?

And,

How does that work?

If everything is done properly and the business is voluntarily dissolved then any directors and officers of the corporation won’t be personally liable for corporate debt after the voluntary dissolution of business.

So, voluntarily dissolving a business basically cuts off any liability that the officers and directors may have for corporate actions either during the time that the corporation was active or during the dissolution process.

Dissolution by Secretary of the State

So, what happens if you’ve already been involuntarily dissolved as a corporation, you haven’t filed your annual report in which the Secretary of State is involuntarily dissolved.

Let’s say you don’t want to continue transacting business.

Should you just stay put and keep your involuntary dissolution? Or,

Should you take some action to voluntarily dissolve your business?

That really depends on the nature of your business.

Well, if you have been involuntarily dissolved by the Secretary of State you can reinstate your corporation.

You have to pay some extra fees to do so and file any delinquent annual reports, something called Articles of reinstatement with the Secretary of State.

Once your business is reinstated you can follow the process that I’m going to talk about to voluntarily dissolve it.

So even if you’ve been dissolved, you can still go through the voluntary dissolution process to cut off liability of officers and directors.

So, when does it make sense to do this because you got to pay some fees to the Secretary of State?

You may have to pay an attorney to help you with it.

This makes sense to do this if you’ve actually transacted business and you’ve interacted with other people which could cause potential liability.

So if your business is a single member corporation that you set up for a venture you are intending to embark on and you never really got started.

You didn’t incur any potential liability then in voluntary dissolution from the secretary of state.

Well, no need to reinstate your business as voluntarily dissolve.

However, if you were operating for a couple of years contracting with people, if there’s potential that someone can sue your corporation for anything.

Then it makes sense to follow the voluntary dissolution process rather than let the Secretary of State involuntarily dissolve you.

This is why because the cost of getting reinstated and going through the voluntary dissolution process.

It’s probably going to pale in comparison to any liability.

As a director or officer you might incur after the involuntary dissolution of business because remember if your company is involuntarily dissolved use a corporate officer liable for any corporate actions which kind of defeats the purpose of the corporation entirely.

So you’re paid to get the corporation set up.

You manage your corporate book if you get involuntarily dissolved and you don’t have a remedy that through a voluntary dissolution process you might be on the hook for corporate debt.

So if you have potentially incurred liability, it makes sense to voluntarily dissolve rather than involuntarily dissolve.


SEVEN STEPS FOR DISSOLUTION OF BUSINESS

These Seven Steps you should take in order to wind up a business.

 Now, let’s talk about the steps to voluntarily dissolving a business.

  1. Step one is serving the notices of the vote to the shareholders.
  2. Step two is obtaining the consent of the shareholders.
  3. Step three is providing notice to the creditors.
  4. Step four is preparation of a distribution report.
  5. Step five is payment to the creditors according to the percentage.
  6. Step six is informing the Secretary of State that you’re involuntarily dissolving.
  7. Final Step is winding up corporate affairs.

 So, we’ll go through these one by one and explain them. 

  • Step one is serving the notices of the vote to the shareholders.

You have to provide notice of the vote and we have a little bit more detail on what notice requirements typically are. 

So it’s important to follow these procedures to the tee when dissolving a business because if you improperly dissolve a corporation without obtaining shareholder consent or properly giving notice and getting the required number of votes then you may be liable as a director to the shareholders. 

So the dissolution process is all about cutting off liability for directors and officers.

  • Step two is obtaining the consent of the shareholders.

Obtaining shareholder consent is pretty simple that the process for the internal process for dissolving a business is either getting unanimous shareholders’ consent to corporation or having holding a vote of shareholders and getting the amount of votes required in the bylaws or if the bylaws are silent on the subject a two-thirds vote of shareholders will dissolve the business.  

This step is making sure you cut off any liability to the shareholders you might have and that consists of going through the proper internal dissolution procedures and going through the voting process or getting shareholder consent.

  • Step three is providing notice to the creditors.

So within 60 days of the actual vote to dissolve the corporation you should mail notice to any creditors of the corporation and the notice have to inform the creditors the date that the business was dissolved. 

The mailing address to which each creditor should send any claims if their own money. 

The deadline for creditors to file claims which must be at least 120 days from the date of dissolution. 

And that if the corporation basically notify the creditor that if the corporation doesn’t receive a claim by the deadline then their claim will be barred and any liability for that claim will be cut off.

So this is basically starting the clock ticking and once you send this notice that creditors will have 120 days to file a claim that they’re owed something.

After the date of the dissolution if they don’t file the claim saying something then any money that the corporation owes them is cut off.

Their claims are barred and they don’t unless they didn’t receive notice or they can claim that there was something improper with the notice their claim is wiped out.

  • Step four is preparation of a distribution report.

You’ve gotten all of the claims in, you should prepare a distribution report and during this whole process you should be cataloging assets and liquidating them and basically creating an account with money in it to distribute.

The distribution report will tell creditors and shareholders how much money has been collected and who it’s going to.

So you’re going to have an inventory of all the assets that you’ve collected and then you’re going to have a list of all the creditors and how much each creditor is receiving and then a list of all the shareholders and how much each shareholder is receiving.

One important thing to note is that creditors have to be paid off in order of priority.

So there are different classes of creditors and we have articles about this.

We won’t go into detail here but each class of creditors has to be paid off in priority before you get to the next class and creditors have to be paid before shareholders and taxes should be paid before creditors.

So a key here is working with an attorney to make sure you’re paying people off in the right or and you know making sure that if there’s not enough money to go around all the creditors and whatever the last class that you’re paying is get paid and basically an equal proportion share.

It’s important to do this right because winding up the corporation incorrectly might be just as bad as not winding it up at all.

Because any creditor that doesn’t get what they should have gotten from this can then sue you personally as an officer and director claiming that you improperly wound up the corporation.

So it’s important to wind up the corporation voluntarily itself. It’s also important to do it right and make sure that the right people get paid. This should be easy because you’ll have all of the creditors’ claims and you’ll know exactly who claims to be owed money. 

  • Step five is payment to the creditors according to the percentage.

The next step is just putting those claims in the right order and making sure they get paid and they’re paid the right amount but you know that’s the report before you pay off any creditors you pay any taxes at the corporation owns.

Then you pay off creditors according to the amount shown in the report and then any remaining assets are going to be distributed to the shareholders often if you’re dissolving a business.

So you should definitely contact an attorney to work with you and make sure that you’re checking all your boxes in and dissolving appropriately because the whole point of starting the corporation and the point of voluntarily and properly dissolving it is to cut off liability and if you don’t do it then your personal liability won’t necessarily be cut off.

  • Step six is informing the Secretary of State that you’re involuntarily dissolving.

Once you’ve voted to dissolve the corporation or obtain shareholder consent is to file Articles of Dissolution with the Secretary of State. 

These articles of dissolution basically let the secretary of state know that you’re dissolving and terminate your responsibility to continue filing annual reports and paying annual fees. 

So you want to do this pretty soon after you’ve dissolved so that another annual report doesn’t become due because if the annual report becomes due before you file the Articles of Dissolution even if you’ve already voted to dissolve you’re gonna have to pay the annual report for you in addition to the miniscule fee that’s associated with the Articles of Dissolution. 

So you’ve now voted to dissolve the company or gotten shareholder consent, you filed articles of dissolution with the Secretary of State.

  • Final Step is winding up corporate affairs.

Last piece of the puzzle is winding up the business affairs of the corporation and this basically consists of liquidating the Corporations or company assets.

Paying any taxes that are owed, paying off any creditors and then distributing the rest of the shareholders and creating a report of what you’re doing. 

So that you can prove if ever called the answer for your actions that everything was done in the proper order and all the assets went to who they were supposed to.

There probably aren’t a lot of assets left to distribute to the shareholders but the assets should be distributed based on the percentage of ownership unless the bylaws state something else.

So sometimes there are different classes of shares and one class will be paid off before the other but again it’s important to do this right.


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