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Dissolution of a Corporation is the termination of the business, either voluntarily by resolution of the shareholders or members, paying debts, distributing assets, and filing dissolution documents with the Secretary of State; or by state suspension for failing to comply with state statues by timely filling annual reports or not paying corporate taxes. Voluntary Dissolution of a corporation or LLC is carried out by filing articles of dissolution to withdraw the corporation as a business entity. The rules concerning corporate dissolution vary by states.
Whether it’s for financial reasons, retirement, shareholders /members dispute or simply because you’ve had enough of the business, there are myriad issues involved in closing down a business. Ceasing operation of your business isn’t as easy as simply hanging a “closed” sign. There are financial ramifications, tax issues, and personal relationships with employees, customers, and suppliers to consider during the process.
It’s critical that you legally dissolve your company, (same as you legally incorporated) because letting it lapse or allowing the state to dissolve it involuntarily could create a number of issues, including:
- Personal liability for judgments against the business
- Expensive federal and state-assessed penalties and fees
- Unnecessary registered agent service payments
The best way to put a stop to these obligations is to file Articles of Dissolution with the state.
Whether you’re a sole proprietor, partnership, limited liability company (LLC), or a corporation the following guidelines should help you cover the basics of closing your business in a more controlled, less stressful manner.
1) Close the Business As Required by Your Business Articles. Follow your operating agreement or bylaws in case of dissolution. If ending the business is what you want to do, be sure to follow the rules to the document, to avoid disputes later on.
2) File with the State. Filing a Certificate of Dissolution (also known as Articles of Dissolution) is a process that varies from state to state. In some states, filing this certificate must be done before notifying creditors, while in other states you must notify creditors first. In either case, creditors’ claims must be resolved in some fashion— either by payment in full, a compromise with them, or bankruptcy.
Additionally, in some states, you are required to clear your back taxes before the state will allow you to file for dissolution. This so-called “tax clearance” comes from the state’s tax agency and simply states that the business is current on its taxes.
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3) Notify the IRS and State and Local Tax Agencies. When you end a business, the company is still liable for any taxes for the prior and current year. You’ll also be responsible for all final tax forms that need to be filed. This includes income tax, any sales tax that has been collected, and payroll taxes. Certain federal tax forms (such as the federal unemployment tax return and the employer federal tax return) contain checkboxes indicating that it will be the last return filed by the business. Of particular concern to the IRS, and therefore to all business owners, is the payroll tax. Payroll taxes that remain unpaid after a business closes are a big deal to the IRS.
4) Cancel Business Licenses. In addition to reporting to local, state, and federal tax agencies, you will need to file paperwork other local agencies to terminate business licenses or permits. By canceling licenses and permits, you prevent others from using your business account or name to run a business and leave you holding the bag for taxes or penalties. Find the agency that granted any license you may have and terminate everything.
5) Notification to Creditors. You’ll need to inform lenders, insurers, suppliers, vendors, and service providers that the business will no longer be contracting for their services and give a method as to how the company intends to wind up its business with those creditors.
Certain states may also require a dissolving company to place an ad in the local newspaper or other publication announcing the closing. In this way, the public and other potential creditors are put on constructive notice (meaning they may not receive a direct notification about the closing but at least have an opportunity to be informed) of the impending closing and can take appropriate action.
6) Settle Creditor Claims. Once you get claims from creditors, you’ll need to inspect the claims and either accept or reject them. An attorney would be advisable here, as state laws may govern what claims you can reject and what reasons are valid. Assuming you have valid claims, the next step is to either pay in full or work out a compromise with the creditor. Since closing the business indicates to creditors that the business is financially unhealthy, they may be more willing to accept less than the full value of their investment, credit, or product.
7) Collect Money Owed to the Business. The flip side of settling creditor claims is to collect any monies owed to the company. You don’t have any obligation to tell those who owe you money that you’re closing the business (unless they’re clients or employees, depending on your state’s laws), and in fact it may hinder your collection process if you tell them. Try to collect this money as soon as possible, as it will be much harder to collect money on behalf of a company that no longer exists.
8) Inform Other Stakeholders About the Closure. You will also need to let your landlord and, of course, your employees, know of the intent to close the business. For the landlord, you’ll need to simply follow the rules outlined in your lease agreement regarding termination of the lease.
9) Sell and Distribute Your Assets. After you’ve settled the claims of your creditors, all that’s left is the business assets, both tangible (e.g., business equipment or stocks) and intangible (trademarks and goodwill). The distribution of these assets remains proportional to the stake of each owner in the business.
10) Meet with a Business Attorney Before You Dissolve Your Business. Finding the right attorney to help you dissolve your business is just as important as working with the right attorney when starting it.
You are not alone in this process.
We are here to help you walk through the hurdle of Federal, State and IRS compliance when dissolving a business from filing your Articles of Dissolution with the State to notify the IRS.
What are the requirements to file a Dissolution?
The requirements vary by state but a general rule of thumb is to be up to date and in good standing with taxes and annual reports. If in arrears, the business must bring any back taxes or compliance requirement up to date to be able to file articles of dissolution. Additional, a notification to creditors through a newspaper or affidavit of such might be required.
Do I need to notify the IRS when closing a business?
Yes and absolutely Yes. IRS Checklist: https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business-checklist
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