How to Dissolve a Corporation?

By Michael Banner - Dec 6, 2013     



Making the decision to dissolve your corporation is not an easy one because you are essentially putting an end to your Corp's existence.  Just as your corporation’s existence started with the filing of articles of incorporation with its formation state; ending your corporation’s existence is finalized by the action (or inaction) taken with your corporation’s formation state.  

However, before your corporation can be dissolved there are other actions your corporation must take and several variables you should consider. 

But first, before all of this, the decision to dissolve must be formally made by the corporation.

Death by committee

Even if you are the only person involved in your corporation, remember that all decisions are done by committee, based on the corporation’s statutory hierarchy.  In other words, you cannot just unilaterally decide, “I’m dissolving!”  

The Directors

The first “committee” to make a decision involves your corporation’s director(s), which again maybe just you.  He/she/they must come together at a Special Directors Meeting and be documented through unanimous consent or corporate resolution, formally deciding to dissolve the corporation and the method (see Two Paths: One Dissolution below) of dissolution.   

The Shareholders

Now, the director(s) must take this decision to the corporation’s shareholder(s) for their approval: Whether one person or many, the shareholders always get the final vote.  This is similarly done at a Special Shareholders Meeting and should be properly documented in the meeting minutes. 

What about the officers?

Once it is formally decided, it is the officers’ job to carry out the decision of the board (which was approved by the shareholders).  Again, this will involve either a voluntary or involuntary method of dissolution. 

Not sure who is who?

If at this point, you are completely confused because you don’t know who is who (director, president, CEO, shareholder, etc.), AND if you haven’t had any operations, you might want to skip down to the “Involuntary Dissolution” & “Previous Operations” areas below. 


Your directors are listed on your articles of incorporation or a separate appointment/election by the incorporator.  Your corporation doesn’t have shareholders until your corporation issues stock.  A corporation can be dissolved by the corporation’s directors if no shares have been issued, and therefore no shareholders.  Check with your state for your particular situation.


Two Paths: One Dissolution

Let’s discuss your corporation’s filing options for dissolving.  Remember, the officers handle the filing after your Corp. has formally decided to dissolve by its directors, and accepted by the shareholders.

Essentially, filing to dissolve with the state can be done either voluntarily (you formally dissolve) or involuntarily (you allow the state to dissolve).   

Voluntary Dissolution

To voluntarily dissolve your Corp., you must file articles of dissolution with the same state agency which formed your Corp. (AKA formation state).  Most state agencies, but not all, will require that the state taxes & fees are paid and up to date before the state will allow dissolution to be filed.

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Involuntary Dissolution

In most states, simply doing nothing will cause the state to involuntarily dissolve the INC for not keeping up with the state's annual filing requirements. If you choose to not keep up with the state's filing requirements, it is called abandonment, because you are abandoning the charter and allowing the state to cancel or dissolve the charter.


There may be negative tax consequences by abandoning an entity which has had operations. Consult your tax or legal advisor to see if this applies to your situation.


So which Method is best?

There are lots of variables to consider when deciding which method (Voluntary or Involuntary) you will follow.  Here are a few:

Cost

As with many business decisions, the method for dissolution may come down to cost.  With voluntary dissolution there is often the cost of filing and the cost of maintenance (i.e. taxes and other annual fees).  Whereas, with an involuntary dissolution the corporation will pay the ultimate cost… death!  But, it does so involuntarily and so the principals often do not have to pay additional out-of-pocket fees to achieve this ultimate goal.

Previous Operations

If your corporation has had any operations (i.e. received income, spent money from the corporate check book, etc.), the corporation will most likely want to take the formal path so as to properly dissolve the corporation. 

Timing

Often formally dissolving before year end or before a Corp’s anniversary date may prevent additional fee assessments by the state were it to still be in existence into another year.  Check with your formation state to find out the deadlines for this. 

Reuse the Corporate Name

If you want to re-use the exact same name in the same state for a new INC or LLC filing, you may be limited or even prohibited from using the name again.  Limitations are typically from 6 months to several years after dissolution, but this depends on the formation state and the method of dissolution. 

Potential Liabilities

If there are any potential liabilities which may accrue to you as a director or officer, due to the corporation’s operations or your own promises, a formal dissolution might be the preferable filing. 

Future Filings in that State

So far (that we know), only Arkansas actually prohibits you from forming any new INC or LLC if you were listed as an officer or director with a previous Arkansas company that was not formally dissolved.  Although other states are not likely to follow suit, it is one more consideration. 
 

Withdrawal in Foreign States

If your INC is formed in one state (formation state) but also registered for foreign authority in another state, and your INC dissolves in the formation state, it must also withdrawal its foreign authority registration in those other state(s).  This is a similar procedure by filing withdrawal paperwork in the foreign state, along with a fee, and making sure state taxes in that state are up to date. 
 

Each State Different

Because each state's requirements are different, you should investigate your formation state's requirements for dissolution before making a decision. You can start the research process by going to State Research (from the SmallBiZ.com Home page) to find your state's website location for more details. 
 

Other Considerations

Besides your formation and registration states, there are other organizations & government agencies to whom you may need to file or report your corporation's "death".  Here is a short checklist (in no specific order):


The IRS - You'll need to file a Final Tax Return.


Your State’s Dept. of Revenue (i.e. state's taxing body) - You may need to also file a final return or provide some other notification with this agency to conclude the corporation's affairs.  Again, paying up all state taxes may be required before formal dissolution filing can take place.


Vendors - Besides lenders, who you would have had to pay in full prior to dissolution, any vendors that you have accounts opened, should be paid and closed.


Banks - You'll need to close out all banking & credit accounts.


Customers - Hopefully you've notified them already.


Social Media Followers - Did your corporation have pages on Facebook, Google+, or some other social media presence?  Shouldn't you let its followers know?

Yes, dissolving a corporation requires a few tough decisions.  Just remember that regardless of the reasons for the death of your corporation, you can always form another one sometime later in the future.

 

About Michael Banner
  CEO & Founder of SmallBiZ.com, created over seventeen years ago to help small business owners simplify the process of starting & managing their small businesses. SmallBiZ.com now serves over 10,000 businesses per year with various filing and subscription services; in addition to the 1000's of daily visitors to www.smallbiz.com, accessing free services, help pages, & educational videos & webinars.


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