Just like life, running a business has its share of ups, downs, and surprises, which is why there are many different reasons why business owners may want to dissolve their LLC or Corporation.
Dissolution, the act of formally dissolving (closing) a business entity with the state, involves far more than just ceasing to sell products and services. Dissolution is a process for wrapping up all legal and financial aspects of the business and legally terminating its existence in the state(s) where it is registered. Business owners and professional services providers who offer accounting, tax, or legal services to entrepreneurs should understand what goes into legally dissolving a Corporation or LLC.
Let’s dig into some of the details involved with the dissolution of a Corporation or LLC.
Top Questions and Answers for Business Owners Needing to Dissolve Their Companies
How Do I Legally Dissolve a Corporation or LLC?
Business owners must file Articles of Dissolution (also called a Certificate of Dissolution) with the Secretary of State office or comparable state agency to file for dissolution in a state. Filing Articles of Dissolution will allow you to end your business entity permanently. Before a state dissolves a company, the business must file all outstanding state fees, reports, and taxes and handle other matters related to winding down its affairs.
It’s crucial to complete the Articles of Dissolution accurately so that the business may close without delays or issues.
Do I Need to Close My Business Before Year-End?
The ideal time to dissolve a Corporation or an LLC can vary depending on the situation. Closing before the end of the year offers the advantage of avoiding fees and tax obligations for conducting business in the new year. For that reason, many business owners try to wrap up dissolution tasks by year-end
For that reason, many business owners try to wrap up dissolution tasks by year-end. I’ve written about this in-depth at 12 Steps for Closing an LLC Before Year End and 12 Steps for Closing a Corporation by Year End.
Does this Process Vary by LLC or Corporation?
The process for dissolving an LLC and Corporation is slightly different.
Before filing Articles of Dissolution, here’s what LLCs and Corporations must usually do:
- Typically, an LLC must hold a meeting with its owners (known as members and have them vote on closing the company. The record of the final vote must be captured in the meeting minutes.
- In most states, if a C Corporation issued shares of stock to shareholders, it needs ⅔ of the voting shares to agree on the dissolution. Generally, if the Corporation did not issue shares, then it must hold a meeting with its Board of Directors and ask them to vote on closing the company. In either case, the record of the final vote must be captured in the meeting minutes.
Does the Process Vary by State?
Yes, it does. It’s critical to check with the appropriate state agency (usually the Secretary of State office) to determine the requirements for dissolving an LLC or Corporation in the state(s) where the business is registered.
What if My Business is a Partnership?
In the case of a partnership, business owners must inform the IRS that their partnership is dissolving. When submitting Form 1065 (U.S. Partnership Return of Income), they must check off the box that says it is the final return. They should complete the form by the 15th day of the third month after the tax year ends.
What Happens to My Existing Customers and Contracts?
Great question! Before dissolving a Corporation or LLC, the entity should collect any outstanding accounts receivables and notify customers that the company will dissolve. If any contractual obligations remain, the business owners must deal with those. This may require the assistance of an attorney to ensure no loose ends get missed in the process.
Do I Need to Notify Creditors?
Yes, it’s important to alert creditors, vendors, and other individuals and entities to whom the company owes money. That will allow those parties to identify any outstanding debt the company owes them and ensure it’s resolved before the business closes. It’s recommended that creditors be notified by mail and provided with information regarding where and by when claims should be sent.
Can I Dissolve a Business With Debt?
When a business has outstanding debts that it cannot pay, the company may be liquidated or closed under administrative dissolution by the state. With liquidation, the company sells its assets to pay off debts before it closes. Partners, members, or directors must approve the liquidation, establish a plan, and notify creditors. The guidance of an accountant and an attorney can help ensure a smooth process. Whereas liquidation is voluntary dissolution, administrative dissolution usually occurs involuntarily when the state dissolves a business after numerous failed attempts to get the business owners to settle their deficiencies.
What Happens to My Business Debts?
If a business cannot pay off its debts before closing, outstanding financial obligations become uncollectable debt for the creditors who are owed money. If business owners have personally guaranteed business loans or debt, they may find themselves sued by creditors, thus exposing their personal assets for repayment of the business’s debts.
What Happens to My Employee Identification Number (EIN)?
The IRS requests that business owners send a letter to close their IRS business account. It should include:
- The complete legal name of the entity,
- The EIN,
- The business address,
- And the reason for closing the account with the IRS.
- If possible, they should also include a copy of the EIN Assignment Notice that the IRS issued when assigning the EIN.
Any outstanding taxes or tax returns due must be filed before the IRS will close an account.
What Happens to Liability Protection When an Entity Is Dissolved?
Dissolving a Corporation or LLC does not automatically terminate the business owners’ personal liability protection. Shareholders and members may still be protected from creditors for liabilities, provided the entity paid all known company creditors before distributing assets to the business’s owners. If a lawsuit is filed after dissolution, owners may still be protected from liability if the company LLC had issued a notice of dissolution per its state’s requirements and wasn’t aware of the claim when the entity was in active status.
What Happens If a Real Estate Entity Has to Dissolve But Still Holds Property?
States’ rules vary. Generally, a real estate entity liquidates its real estate holdings as part of the dissolution process to terminate its existence. This applies whether the business owners voluntarily dissolve the entity or the state has administratively dissolved it.
Some states allow an entity to convey its real property even after the entity has dissolved, provided it does so in a reasonable amount of time (the meaning of “reasonable” varies by state).
Potential issues could arise if the dissolved entity no longer has a bank account (or an EIN to open a bank account) to receive real estate sales proceeds or the entity never had governance documents (e.g., LLC operating agreement or bylaws).
Possible ways to resolve those snafus include:
- Reinstate the entity so that it can open a bank account to receive real estate sales proceeds.
- Convey real property to the shareholders or members so that proceeds from the sale are distributed to each owner according to their share of ownership documented in the entity’s operating agreement or bylaws.
- Draft governance documents before formally dissolving the entity or having the owners or shareholders sign a certification and indemnification document to claim signing authority for the dissolved entity.
Talking with a real estate attorney can help ensure that all legalities are considered and handled correctly. Selling property has significant tax implications, so it’s also important to consult an accountant with expertise in real estate transactions.
How Do You Dissolve a Company That’s in Bad Standing?
If an LLC or Corporation has failed to fulfill any of its compliance obligations (such as filing and paying taxes, submitting annual reports, not renewing required business licenses, etc.), it may fall out of good standing with the state. When business owners wish to voluntarily dissolve a company in bad standing, they must first file to reinstate the entity to good standing. The rules for reinstatement vary by state. Generally, it involves resolving the issues (e.g., submitting past due reports and paying outstanding taxes and fees) that put the company in bad standing and then filing a reinstatement application with the state.
After the entity is reinstated, the owners may proceed with the usual steps to dissolve an LLC or Corporation in the state.
Is there a Checklist I Can Follow?
As I shared earlier, the process to accomplish the dissolution of a Corporation or LLC varies from one state to the next and by business entity type. Below is a handy checklist of the typical steps involved when dissolving a business:
- Dissolve the business structure – Hold the necessary meetings and votes to obtain approval; record the results of those votes in meeting minutes.
- File Articles of Dissolution – Let CorpNet help you by preparing and submitting the form.
- Collect any outstanding accounts receivables – Collect money owed to the business from customers. If this might be difficult or too time-consuming, you may want to explore selling your accounts receivable to a factor.
- Sell the company’s assets – Selling assets and inventory can help business owners generate more cash before they close their doors. Besides holding a sale at your location, Craigslist may be a viable option for selling office equipment, furniture, and supplies. Another way to sell assets is by holding an auction to attract other business owners.
- Pay off outstanding business debts – Plan to settle outstanding accounts payables with your vendors, suppliers, and creditors. If you can’t pay everything, talk with your attorney about your options.
- File final payroll taxes – Businesses with employees must submit their payroll forms and pay payroll taxes after they’ve paid their employees for the last time. Talk with your attorney and accountant about filing Form 656 with the IRS to make an Offer in Compromise if you’re unable to pay your payroll taxes in full. Another option that may be worth exploring is setting up a payment installment plan by filing IRS Form 433-A.
- Pay final state sales tax obligations – If your company collects sales tax on the products and services you sell, submit the final state sales tax forms. Then, ask your state tax agency what you must do to close your sales tax account.
- File final income tax returns – There’s usually a final return box that needs to be checked off by LLCs and Corporations that are closing and making a final return. A tax professional can help ensure that final returns are completed correctly. Another form that applies to some businesses is Schedule K-1, for reporting shareholder allocations (and losses) for partners.
- Cancel business licenses and permits – All licenses and permits issued by federal, state, county, and local agencies should be canceled. Otherwise, the business may still be on the hook to pay them.
- Distribute cash and assets to business owners – After all debts, taxes, payroll, loans, and fees are paid, a business will usually have the green light to distribute the remaining money and property to the business owners. LLC owners typically get distributions proportional to their share in the business. Corporations allocate assets among their shareholders based on the number of shares they own.
For even more information, review my article Closing a Business Checklist: Ten Steps From Our Experts.
Year-End Tips for Accountants, Tax Advisors, and Business Consultants
Those of you who help entrepreneurs with the legal or financial aspects of their companies may have clients who can benefit from a business compliance checkup before this year wraps up. Below are some ideas for how you might assist them.
Help Your Clients Prevent Tax Filing Fees and Penalties
Do your clients need to catch up on filing returns or in paying any of their tax obligations for the year? Now is a good time to take stock of where they stand. If they’ve fallen behind, they must understand the sooner they catch up and become current, the fewer fees and penalties they’ll face.
Validate Your Clients Are in Good Standing
When your client is in good standing, it means that their business is legally registered with the state and authorized to conduct business there. Good standing requires following the state’s rules for conducting business in its jurisdiction (e.g., paying taxes, filing the necessary reports and other documents, obtaining the required licenses and permits, and possibly fulfilling other requirements). A state’s business filing agency (typically the Secretary of State office) can confirm or deny if a business entity is in good standing. If your client is pursuing an activity such as applying for a loan, forming a contract with another company, or setting up a credit or debit card payment processing system, they may need to request a Letter of Good Standing from the state.
Verify Your Clients Have Completed Their Annual Compliance Filings With the State
The annual business compliance filings a client must submit and pay for depend on the state and the business structure. Some common examples of annual compliance filings include:
- Annual report or biennial statement
- Annual meeting minutes
- Franchise tax
- Articles of Amendment (in the event of major changes to the company, such as an address, name, membership, or new shares)
CorpNet’s free Compliance Portal can help your clients stay on top of what filings must be completed and when they are due.
Help Clients Formally Perform Name Changes with the State
If a client wants to change the business name before the end of the year, the process and amount of time it takes to accomplish it will depend on the state and the business entity type. I’ve recently written an article with details about what’s involved in making a business name change.
Validate Your Clients Have the Proper Business Licenses and Permits in Place
Some licenses and permits expire, so it’s critical to ensure clients have renewed—or plan to renew—whatever their state requires. Operating without the proper licenses and permits is illegal. Check with the appropriate state, county, and local agencies or consider CorpNet’s Business License Service Packages to identify what clients need.
Convert Clients to the Correct Business Entity
Before the year ends is an ideal time to consider if a client’s business structure is still the right option. A business’s situation can change as it grows and evolves. Converting to a different entity type may prove advantageous for tax or liability reasons. It’s wise for your client to seek professional tax, accounting, and legal insight before deciding on a business entity change. After your clients have the expert advice they need to make an informed decision, filing the business entity conversion.
Help Clients Get Reinstated for Noncompliance or Prior Dissolution
If you have a client whose company has been placed in non-compliant status or administratively dissolved by the state, refer them to CorpNet to help them get reinstated. Reinstatement is a legal filing to officially bring an LLC or Corporation back into good standing and active compliant status.
Enroll in the CorpNet Partner Program to Help Your Clients and Open a New Revenue Stream for Your Business
The CorpNet Partner Program is cost-free to participate in, and it allows you to generate additional revenue for your company. You have two options, each providing a unique way to boost your income potential:
- Become a CorpNet Reseller – Offer our business formation and compliance services to your clients under your brand. You get wholesale pricing and then sell our services to your clients at retail rates. We do all the work as your silent fulfillment partner.
- Become a Referral Partner – Refer your clients to us for their business startup and compliance needs. You send us the business, and we send you a commission check.
CorpNet Is Here to Help You Through Every Stage of Your Business
Whether you’re a business owner closing a Corporation or LLC or a professional in an advisory role helping entrepreneurs navigate changes, everything is easier with the right resources to assist you. From formation to dissolution, my CorpNet team will ensure your filings are completed accurately and on time. Call us at 1-888-449-2638 to talk with one of our filing specialists today!
File Your Articles of Dissolution
If you need to close your business, CorpNet is here to help you file your Articles of Dissolution. Save time and alleviate stress by letting our filing experts handle the details!
