Company Dissolved? Legal and Financial Consequences to Expect

A company is dissolved; legally, it ceases to exist. Accordingly, dissolution results in significant legal and financial consequences.  It is a process that must be properly managed to avoid continuing liability.

The Corporate Dissolution Process

Corporate dissolution is the legal process of formally closing a corporation, paying its debts and distributing the remaining assets. Most dissolutions are voluntary, meaning that the company initiates the process. However, dissolutions can also occur involuntarily. For instance, an administrative dissolution may be imposed by regulators for noncompliance with tax or annual report filing obligations.

In a voluntary dissolution, a company’s bylaws and operating agreement will typically outline how to voluntarily dissolve the company, addressing issues such as the number of owner votes required to dissolve, the wind-up process, and preferences for asset distribution. State laws fill in the blanks when necessary.

Important Financial Consequences of Dissolution

Dissolving a corporation is a complex, multi-step process. If not executed properly, the corporation and its owners could face financial liability even after ceasing operations.

Below are some key financial consequences of dissolving a corporation:

• Ceasing Business: Companies that are dissolved must cease doing new business. They continue to exist solely to wind up their affairs. Only when the winding up is complete is the dissolution complete.
• Asset Liquidation: Companies must sell off their assets, such as equipment, inventory, real estate, and intellectual property. They must also collect on all outstanding invoices and/or sell off any outstanding judgments, claims, and debts owed to the business.
• Debt Settlement: Companies must settle all outstanding debts and obligations, including loans, invoices, and rent payments. Unpaid creditors may pursue legal action for outstanding debts even after a corporation is dissolved.
• Shareholder Distributions: Once all debts are paid, any outstanding funds must be distributed to the company’s remaining shareholders in accordance with their ownership percentages. Owners who would rather transfer the business than liquidate it should consider how trusts in business succession planning can preserve value for the next generation.
• Tax Obligations: Companies must file final federal, state, and local tax returns. This generally includes a final corporate income tax return, as well as sales tax, payroll tax, and any other business-related taxes. For instance, when you sell your business as part of a corporate dissolution, it triggers additional taxes on selling the business. State taxing authorities generally must give final approval to complete the winding up process.
• Employee Wages: Dissolution can also result in employee-related costs. Companies may be required to pay final wages, severance, and/or accrued vacation. Additionally, unemployment insurance and final payroll tax obligations must be satisfied.

Important Legal Consequences of Dissolution

After a company is dissolved, it is no longer considered an active entity, eliminating the need to file and pay annual tax returns, prepare annual reports, maintain a registered agent, and manage other compliance tasks. Below are several other key legal consequences of dissolution:

• Future Liability: Proper dissolution is essential to terminating liability. If a corporation is not formally dissolved, third parties may continue to sue it as though it is still in operation. Additionally, corporate executives may be held liable for unpaid tax liabilities. In many states, a corporate officer or director who distributes any assets in a dissolution or liquidation to the stockholders without first paying all corporate franchise taxes, fees, penalties, and interest may be held personally liable.
• Contracts: Every business has numerous contractual obligations that must be addressed during dissolution to avoid breach-of-contract claims. Each agreement should specify the process for notifying the other party of your intent to dissolve the business and terminate your contractual obligations. Seeking legal guidance can help reduce the risk of a breach-of-contract claim. If you lease property, an attorney can also help you negotiate the most favorable terms for ending your lease.
• Accounts/Licenses: To avoid incurring future liability, it is imperative to close/cancel all business accounts, licenses, and permits, including bank accounts, credit cards, insurance policies, and business licenses.
• Filing Requirements: Companies must file formal documents with the Secretary of State or equivalent agency. For example, New York corporations must first obtain written consent from the Tax Department and then file a Certificate of Dissolution with the Secretary of State.
• Recordkeeping: Companies should maintain business records even after dissolution. The required retention period depends on the record. For example, Internal Revenue Service (IRS) record-keeping standards require employers to keep employment tax records for a minimum of four years after the date the tax was due or paid.

Work With an Experienced Business Dissolution Attorney

When a company is dissolved, it is imperative to take all necessary steps to close the business and formally resolve all outstanding liabilities. At Scarinci Hollenbeck, we work with business owners to make the process as seamless as possible so that you can move on to the next phase of your life. Our experienced business dissolution lawyers have decades of experience serving as trusted advisors to corporations, LLCs, and partnerships of all sizes. From negotiating a dissolution agreement to filing the final paperwork, we can guide you through the process while also safeguarding your best interests every step of the way.