Business Dissolution – What You Need To Know

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What happens if a company is dissolved? After dissolution, a company legally ceases to exist as a business.

Dissolution of a Company

Dissolving a company refers to the formal “winding up” of the business. The dissolution process involves various legal formalities, including ceasing business operations. In Virginia, you need to file articles of dissolution (corporation) or articles of termination (limited liability company) with the State Corporation Commission. In North Carolina, you must file articles of dissolution with the Secretary of State. Dissolution terminates the existence of a company, but you must still:

  • Wind up business operations
  • Liquidate business assets and payoff debts

The impact of dissolution on the owners of the company (shareholders of corporation or members of a limited liability company) depends upon its financial situation. The owners may:

  • Receive their original investment into the business
  • Receive nothing at all
  • Be obligated to pay additional money if the company becomes insolvent

The first step to begin the process of dissolution is to pass a resolution to dissolve the company. Passing such a resolution will depend upon the unique management structure of the business. For corporations, this will depend upon the terms of the Bylaws. For limited liability companies, passing a resolution will depend upon the terms of the Operating Agreement. Once the resolution is approved, you can file the required documents with the state corporation commission or secretary of state. You must file this document in the same state where your company was incorporated (for corporations) or organized (for limited liability companies). You may also have to file some other forms, so it is important to check requirements with your business attorney.

Voluntary vs. Involuntary Dissolution

Voluntary Dissolution:

Steps for voluntary dissolution include the following:

  • Filing articles of dissolution or termination.
  • Ceasing business operations.
  • Liquidating the remaining assets of the business.
  • Repaying all outstanding debts, claims, and taxes.
  • Distributing any surplus funds among the owners (i.e. shareholders or members).

Involuntary Dissolution:

Owners of a business can file a lawsuit seeking judicial dissolution of the company. In such a situation, the court may issue an order to dissolve the company. This usually happens when the relationship between the owners is such that it inhibits proper business operations (such as voting deadlock or disagreement on major business decisions).

Also, there may be specific provisions in the company’s bylaws or operating agreement that trigger an involuntary dissolution. It is vitally important to consult with an experienced business attorney to properly implement dissolution provisions in your bylaws or operating agreement.

Liquidation of Assets

After a company is dissolved, it must liquidate its business assets. This process involves the sale or auction of the company’s non-cash assets. It is important to remember that any assets used as collateral on a loan must be sold to repay the loan or given to the bank or creditor that issued the loan.

Business Owner Distributions

The final step of dissolution involves distributing the company’s remaining assets among the owners (shareholders or members). The assets may include the money kept in bank accounts or cash obtained from selling assets of the business. The distribution of assets of the business to the owners is based upon ownership percentages, unless otherwise indicated in the bylaws or operating agreement.

Distributions can only be made to owners after all outstanding debts of the business are paid. If distributions are made to owners without first paying creditors, the creditors can sue the owners for improper distributions. If there are any unpaid taxes, owners can be held personally liable to repay those taxes.

The business must also file a Form 1099-DIV if the amount distributed to any owner is $600 or more. The distribution amount the owner receives is not taxable if it does not exceed the original investment. If any shareholder receives a distribution amount of less than his or her original investment, he or she can claim a capital loss in his or her annual tax return. If the distribution amount received is more than his or her original investment, the excess amount will be treated as short- or long-term capital gain, depending upon the period of investment.

With any business dissolution, the owners should seek assistance from an experienced business attorney to ensure compliance with all legal requirements.

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