Dissolving a company – what you need to know

Every year, hundreds of thousands of businesses are being dissolved in the US. The reasons for dissolution may vary, but company owners must all follow a similar procedure.

Depending on the size of your business, dissolution may be a relatively quick affair, but the larger the company, the longer it may take. In certain cases, deregistering may also not be your best solution. We’ll explore the individual steps to end a business to help you minimize stress during this difficult time.

Reasons to terminate a business

Sometimes businesses come to an end and must stop operating permanently. In that case, owners must dissolve their company. But going out of business is not the only reason why companies dissolve. Other possible reasons include:

  • Changing the legal business structure
  • Moving the company to another state or country
  • Selling parts or all of the business
  • Mergers
  • Legal succession
Note

If you’re a freelancer and do not have any employees, dissolution is fairly straightforward and involves paying your taxes, informing the IRS of your change in circumstances and canceling any business licenses. For sole proprietorships, the steps involved in officially ending a business are similar to those for corporations and LLCs.

If you’re moving your business to a new state, or are beginning to operate your business in another state you have four different options:

  • Keep your existing company and file your new business as a “foreign company” in a different state. You must foreign qualify if you are operating your business in another state than the one you registered in.
  • Allow another company in a different state to purchase your company’s assets and dissolve your company.
  • Merge your company with a new business before dissolution.
  • You may opt for a foreign entity conversion, but this option isn’t supported by all US states.

Company dissolution – step-by-step

Much like registering a business with the state and the IRS, dissolution involves telling the relevant authorities about your change in circumstances. The most important documents to file will include the Certificate of Dissolution and sometimes also a Certificate of Cancelation both of which are filed with your state, and tax forms need to be filed with the IRS.

However, before you file the relevant documentation you must consult relevant parties depending on the legal structure of your business. Corporations require the approval from shareholders to act, whilst LLCs need to approve a dissolution with their members. The exact voting procedures will be outlined in your operating agreement.

If everyone agrees, you should tell creditors about the closure of the business and allow enough time for them to make final claims. Normally, these deadlines are set at state level.

Filing the required documents

Once approved, a company needs to prepare the Certificate of Dissolution to be filed with the state. The certificates can be obtained by contacting your local Department of State. You can fill out an online form. The dissolution agreement is then filed with the secretary of state or a similar state department. There will likely be a fee but the exact amount varies by state.

Where a corporation pays minimum franchise tax, a short form for dissolution is available in some states. The filing process takes around two to three weeks but can be sped up when choosing an expedited service.

Deadlines

The deadlines to file relevant forms can vary from state to state, but will usually require business owners to first file a certificate of dissolution followed by a cancelation agreement within 12 months.

It’s important to note that there will be a fine for not reporting a company dissolution (in Delaware, for example, the fine is $125 plus 1.5% interest added for every month being late).

However, there are no specific times of the year (for example, the beginning of a new tax year) when you should file for dissolution. That means you can dissolve your company at any point during the year.

An example of a LLC dissolution in the state of California

To get a better idea of the steps involved in ending a business, let’s look at an example using the state of California. As mentioned, exact dissolution proceedings will vary by state.

Let’s assume you are closing an LLC in California. You must follow these steps:

  • Seek approval for the decision to dissolve the company from a majority of its members. Follow procedures set out in your operating agreement.
  • Notify your creditors.
  • Wrap up the LLC’s business by canceling your local business license or other permits and collect any monies outstanding.
  • File and pay final employee tax returns.
  • File all outstanding tax returns and pay taxes.
  • Distribute remaining assets among members.
  • File a LLC-4/7 form with the secretary of state by post.
  • If your LLC was formed within the last 12 months, you can file the LLC-4/8 short form by post.
  • File tax returns for the final year.

Costs of a company dissolution

The costs involved in dissolving a company vary by certain factors and according to state. Certificate filing fees can range from free to hundreds of dollars. But there are many other costs you should consider including legal fees to settle outstanding lawsuits. You may also have to settle outstanding bonuses for employees or pay fees to wrap up other business processes.

Small business dissolution

If you’re looking to end operation of a small business, the procedure to dissolve is the same. Whether your business is an LLC, sole partnership or partnership, you will need to follow many of the steps above. However, for sole proprietors or one-person businesses, the dissolution process may be a lot quicker because you won’t need to get approval from anyone else. If you don’t have employees, you’re able to forego those filing steps. In other words, dissolving a small business can be as quick as setting it up.

Dissolving a business vs putting it on hold

Sometimes you may not want to fully terminate your company. If, for example, you think there may be a chance that you could return to a business in a few years’ time, you could put the company on hold. This makes sense where you aren’t certain that complete dissolution is the best way forward or you have to temporarily take a leave of absence due to sickness.

Importantly, if you are putting your business on hold, you must continue to send in the relevant tax information to the IRS. Annual tax returns are a requirement of a registered business, whether it generates a profit or not. You simply won’t be taxed if your business doesn’t generate a profit. However, beware that tax forms for certain legal forms may incur a fee.

Make sure you settle all debt and outstanding payments before you put a company on hold. You should also cancel long-term contracts if you don’t plan on fulfilling them.

Other things to consider when dissolving your business

Remember to file a final tax return for your business if you have decided to terminate operation.

You should also cancel the following contracts as soon as your business ceases operation. Some contracts will have a termination and notice period, so make sure you check the small print and leave enough time for them to be canceled.

  • Rental contracts
  • Energy supplier
  • Insurance (public liability, accident insurance)
  • Phone and Internet contracts
  • Customer and delivery contracts
  • Advertising and marketing contracts
  • Bank accounts
  • Mandates

Click here for important legal disclaimers.


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