By Nellie Akalp.
Whether due to a failure to file reports, pay taxes, or meet regulatory obligations, there may be a time when a company falls into bad standing. When this occurs, dissolution may be a solution. But it’s important to act quickly. With the end of the year fast approaching, it’s advisible to dissolve a client’s company as efficiently and as smoothly as possible.
Although it’s not mandatory to dissolve a company by the end of the year, doing so has many benefits. Most importantly, it saves on the costs associated with continuing to operate after the new year, such as fees as taxes. Tying up the loose ends before Dec. 31 means these costs can be avoided. Plus, it has the added bonus of starting off the new year fresh.
Closing a company, whether an LLC or a corporation, isn’t as simple as ending sales or stopping services. It is a formal process to address all outstanding legal and financial aspects of the business in the state in which it was formed. Failing to dissolve a company properly can have many repercussions, the greatest being financial penalties and ongoing tax obligations.
Being in bad standing isn’t the only reason to dissolve a company. Most commonly, the business simply isn’t profitable. Or the market is saturated, making success less viable. In some cases, management disagreements become irreconcilable. Or, a company becomes inactive and wants to remove the burden of compliance such as filing reports or taxes. Oftentimes, it comes down to a personal reason, such as the desire to spend more time with family, retire, or move.
Return to Good Standing
It’s important to note that before dissolving a company that’s in bad standing, the company must first be brought back into good standing. That means addressing the issues that caused it to fall out of good standing in the first place: filing the necessary reports, paying back taxes, or fulfilling compliance obligations. Once this is completed, the company must file a request for reinstatement from the appropriate state agency, typically the secretary of state’s office. There are typically some fees involved with this filing.
How to Dissolve a Company
The process to dissolve a company can be complex and varied, depending on the type of company, the state in which it’s located, whether it has employees, and whether it issues shares of stocks to stockholders. The process can be legally and financially complicated, so it’s important to research the requirements and obtain all the pertinent information ahead of time. Following are the typical steps in dissolving a company.
Hold a Vote
Before moving forward with the dissolution process, a company must take an official vote. For LLCs, this means holding a meeting with owners/members and voting on whether to dissolve the company. The final vote must be officially recorded. For C Corporations, this entails holding a meeting with the board of directors. If the company issued shares of stocks to stockholders, the vote requires a two-thirds vote to dissolve. This vote must also be officially recorded.
File Articles of Dissolution
Also known as Certificate of Dissolution or Certificate of Termination, these documents must be filed with the secretary of state (or comparable agency) in the state in which the company was formed. It serves as an official record of the intention to cease business operations, thus relieving the company of future fees, taxes, and compliance obligations. There is typically a fee associated with this filing.
For corporations that are foreign qualified to conduct business in other states, filing separate Articles of Dissolution aren’t typically required. However, those states should be notified of the company’s intention to dissolve. In addition, any business permits or licenses used in those states should be canceled.
File a Final Tax Return
When dissolving a business, one of the key steps is filing the last federal, state and local tax returns. Any outstanding tax obligations must be paid. If applicable, final payroll tax returns must also be filed and payroll accounts closed, as well as any sales tax. Finalizing tax returns prior to the end of the year prevents tax obligations from rolling over into the following year.
Notify the IRS
Dissolution also involves closing a company’s IRS business account. Before doing so, any outstanding tax returns must be filed and tax obligations paid. In closing the account, the following information must be provided:
- The Employee Identification Number (EIN)
- The legal name and address of the business
- The reason for closing the account
Cancel Business Permits and Licenses
Part of the dissolution process is canceling any business permits and licenses. It’s important to cancel each permit from each jurisdiction; for example, city, county and state permits. Failing to do so can result in additional bills.
Notify Creditors
Another key step in the dissolution process is for the company to notify any creditors or vendors of the intention to dissolve. This allows those individuals to identify outstanding debt and ensure it’s resolved before the company ceases operations. It’s a good idea to provide creditors with contact information so they know where claims should be sent.
Resolve Debts
Dissolution is a bit trickier for companies with outstanding debt that they cannot pay. In some cases, the company may be liquidated, with the sale of assets being used to pay off debts. If this is not possible, administrative dissolution occurs, in which the state dissolves the business. Outstanding business obligations become uncollectible debt.
Distribute Cash and Assets
Once all taxes, fees, and debts are paid, the company can then distribute any remaining money or assets to the business owners. LLC owners typically get distributions proportional to their share in the business, while corporations allocate assets among their shareholders based on the number of shares they own.
Don’t Wait to Dissolve a Company in Bad Standing
It’s never an easy decision to dissolve a company. But once the decision is made, it’s important to do it correctly. Filing reports, paying taxes, and addressing compliance issues are the first steps in dissolution. Although the process may seem daunting, you can help your clients close this chapter with minimal stress and financial risk.
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Nellie Akalp is a passionate entrepreneur, recognized business expert and mother of four. She is the CEO of CorpNet.com, the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States.
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Tags: Accounting, Small Business
