Business Dissolution Under the Law

For some business owners, a time will eventually come when running a business no longer makes practical or financial sense. While many may think that the process of closing up shop is as simple as notifying customers and walking away, the process of winding down a business can be complicated. Especially when there are multiple shareholders involved, the ending of a business, also known as “dissolution,” takes careful thought and consideration.

Making the Decision to Close

If you are a sole business owner or in a small partnership, the decision to close your business may be as simple as deciding to do so and then doing it. You will need to inform others in a partnership of your decision and get their input, but the process need not be too formalized. However, if you are running a company governed by a partnership agreement, a limited liability corporation, or a company governed by an operating agreement, you will need to follow the process of dissolution outlined in those governing documents. For instance, in many corporations, the decision to dissolve requires the vote of a majority of shareholders and cannot simply be done unilaterally. If your corporation’s documents do not explicitly address how to dissolve the company, you will want to turn to the laws of your state for guidance.

Letting Others Know

After your business has formally made the decision to dissolve, the next step is to notify certain key individuals, including creditors and the state in which your business is incorporated. All states require that businesses that intend to close file dissolution paperwork with the state to formalize this decision. The form is usually straightforward and acts as a record of the dissolution.

In winding down your business, you must also notify creditors of the intent to dissolve so that any outstanding claims or issues can be promptly dealt with. This includes notifying lenders, suppliers, and any individuals or entities that provide your business with services or goods. Typically, notice must let the creditors know that you intend to close the business and give them time to file a claim, if necessary. Some states also require generalized notice to be published in newspapers or other formats so that any individuals with potential claims are put on notice of the pending deadline.

Finalizing Asset Distributions

Once creditors have made any outstanding claims, and those claims have been addressed, one of the last steps for a business is to sell or distribute any remaining assets to owners of the business. Typically, the funds or assets left over after a business has closed are distributed in proportion to the percentage of ownership interest that each owner has in the company.

Taxes

Finally, all business owners must remember to address any outstanding tax issues when closing a business, and they must also make sure to file the correct business closure forms with the IRS. In the midst of the winding down of business affairs, many corporations mistakenly forget to address unpaid payroll taxes or file required paperwork with the IRS. The government takes these types of mistakes very seriously, so it is in the owners’ best interest to pay close attention to all tax requirements and make sure that they are closely followed.

Last reviewed October 2024