Sometimes, a business needs to close its doors. Ending any business is hard, but the bigger the business, the harder the process can be.
Dissolving a corporation, for example, is often no simple task.
In general, you’ll need to file the articles of dissolution — much like you filed the articles of incorporation to form your business — but there are also some tricky aspects that could be somewhat confusing if it’s your first time dissolving a corporation.
In this guide, we’ll help cover the basics of how to dissolve a corporation, from the first vote to the final wrap-up.
Rocket Tip: If you’re ready to dissolve a corporation, there are a lot of good online incorporation services that can also file the dissolution paperwork on your behalf.
Vote to Dissolve the Corporation
The first step to dissolving a corporation is to ensure everyone is on board with closing the business, which calls for a vote to dissolve. In a corporation, this vote is two-fold.
First, a board meeting should be held so the board of directors can discuss and vote on the initiative to dissolve. Then, once the board members have agreed to dissolve, a similar meeting should occur for the shareholders. Unlike an LLC, which is both directed and owned by its members, the corporation has both the directors and shareholders — both parties should have a role in the decision to dissolve.
Usually, a simple majority of the shareholders must vote for dissolution in order for the initiative to pass. The exact number of votes required in favor of dissolution will vary from one state to another, but in some states, it takes the agreement of at least two-thirds of the shareholders.
Both state law and the corporation’s bylaws govern exactly how this voting process should occur. The corporation should consult and abide by these guidelines throughout the entire process.
Obtain a Certificate of Tax Clearance (Where Necessary)
Before dissolving, each corporation needs to fulfill its financial obligations, taxes included.
To that end, some states require all dissolving businesses to obtain a certificate of tax clearance from the IRS and the state Department of Revenue. This document proves that you have fulfilled all of your tax obligations prior to dissolving.
If your state requires these certificates, you’ll need to get them prior to filing the articles of dissolution. Getting the tax clearance isn’t always a timely process, so you should plan accordingly in case it takes longer than expected.
File Articles of Dissolution
The articles of dissolution (sometimes called the certificate of dissolution) is the document that officially ends your business activities. You can usually find the form with your Secretary of State’s office, and you can usually file online or by mail, rather than filing the forms in person.
The form requests information about your business, such as who voted to dissolve, a description of the voting results, and more.
The certificate is typically all you’ll need for this step, but a few states require you to submit a notice of your intent to dissolve first, and as we mentioned previously, if your state also requires a certificate of tax clearance, be sure to include it.
Notify Your Creditors
If there are creditors or other claimants (excluding your shareholders) who are owed money, you also need to notify them. Notifying them gives them an opportunity to stake their claim, and it also lets them know that you can no longer incur debts.
Your letter to your creditors should include what period the claimants have to make their claims. If your creditors do not make their claim during that time period, you are allowed to bar their claims.
In most states, this period lasts for around three years, although you’ll want to check with your state to see what the exact timeframe looks like.
Wind Up Your Business Affairs
Before you officially close up shop, you need to end all your affairs. For example, you’ll need to finish up contracts or withdraw from them, and also take care of any commitments you might still have to your employees. If you have a lease for your business location, you may need to withdraw from it as well, if it hasn’t ended yet.
Once your creditors are paid, you can liquidate your business assets. This includes property, equipment, company cars, and other similar assets. Once you’ve liquidated all of your assets and paid all your financial obligations, you can distribute the remaining assets to your shareholders.
All steps of your wind-up should be completed in accordance with your bylaws and state regulations.
Cancel Any Licenses and Registrations
Some business licenses do not automatically expire, so you’ll need to cancel them yourself. If you don’t, the licensing board might automatically charge you renewal fees, which can rack up pretty quickly.
Even if you don’t have to cancel your licenses, you may just want to notify the licensing board that you’re no longer operating. That way, they can remove you from any mailing lists, and they’ll have a more accurate idea of what businesses remain operational in the industry.
Cancel Foreign Registrations
For the majority of this guide, we’ve covered how to dissolve a domestic corporation, or one that was incorporated in-state, but it’s not uncommon at all for a corporation to operate in multiple states.
If you received authority to operate your corporation in additional states by getting a foreign registration, you do need to cancel it. You can do so by filing an application for certificate of withdrawal. You need to complete this step for each additional state where you operated your corporation.
By notifying them, you will no longer be subject to any out-of-state fees, and those states also won’t expect you to keep up with ongoing corporate maintenance requirements.
Can I Just Stop Operating to Close the Business?
The dissolution process can be rather complicated, so it may be tempting to just stop conducting business and hope for the best. Technically, you can informally close up shop by simply stopping, but for many obvious reasons, this is a terrible idea.
Here’s why: a corporation is perpetual, and it doesn’t end until you formally dissolve it with the state. If you don’t file to end it by filing the articles of dissolution, your business will still exist. Without this crucial filing, your corporation will continue to incur fees for compliance requirements like annual reports and licenses, while unpaid fees and debts can set you up for later liability and even lawsuits.
It’s a much safer idea to take the time to formally dissolve your business, rather than simply throwing your hands up and hoping for the best.
Dissolving a corporation requires time and meticulous effort, but it pays off to dissolve your business correctly, because it protects you from perpetual liability.
If you have any further questions beyond those we’ve covered in this article, you should probably consult with a business attorney to make sure you’re completing each step of the dissolution process correctly.