How To Properly Dissolve A Company
There may come a day when your business must close its doors. Every business owner dreams of a generational company that can be passed on, but the reality is that many fail. You can find statistics floating around the internet of business failure rates, anywhere from 80-96% within the first ten years. Whatever the true percentage may be, the occurrence rate his high enough to plan for the scenario.
When faced with dissolution, you and your partners will be tempted to throw your hands in the air, move on with your lives, and let the pieces fall where they may. You’re protected by that veil of limited liability after all, right? The truth is that you will need to close out the business, or “wind up,” just as diligently as you ran it during its heyday. There is an order of operations for dissolving that needs to be followed, or you could be exposed to personal liability – or worse, criminal prosecution under tax laws.
What Triggers Dissolution?
Sometimes the best advice is to know when not to act. You’ve got to be keen on the company’s status so you can react accordingly. To do so, you need to know exactly what triggers dissolution.
Dissolution may be triggered in the following ways:
- By an event specified in the operating agreement or bylaws
- By a vote of the Members or Shareholders
- If the company purpose becomes illegal (the marijuana industry seems to be trending in the right direction, but marijuana companies will be keeping a close eye on this trigger)
- By judicial determination; or
- By business insolvency, bankruptcy, or assignment for creditors’ benefit
Dissolution may be an obvious and even anticipated result of Member or Shareholder action (what’s called an unforced dissolution); but it may be the result of something less obvious such as a change in law or an issue with a debt. You’ll want to keep a business attorney close at hand to monitor your status. The last thing you need is to be running a business in breach of contract or law.
Appointing an Agent to Wind Up
Winding up is a lot of work. You’ll likely need to appoint an agent or owner in charge of the process (in fact, Ohio General Corporation Law, ORC §1701, requires appointment of an agent). Your operating documents might identify this individual(s); if not, you should choose a capable agent or team when the time comes.
Notifying the Government
If and when dissolution is triggered, the first step for both LLCs and corporations is to file a Certificate of Dissolution. If you’re dissolving an LLC, you need to notify the Bureau of Workers’ Compensation and the Ohio Jobs and Family Services Status and Liability Section.
If you’re dissolving a corporation, there are a few extra steps. More than just providing notice, you’ll need to confirm with the Bureau of Workers’ Compensation that all premiums have been paid, and provide the Bureau of Jobs and Family Services with evidence that payments are current on your unemployment compensation fund.
Corporations also need to file a notarized affidavit of personal property with the state, identifying all counties where the business owns personal property. Next, you’ll need to seek tax clearance with the Ohio Department of Transportation and report to the Internal Revenue Service (which has its own checklist that you can tick off).
Notifying Creditors
After squaring away with the local, state, and federal governments, the company needs to wind up internal affairs. Part of this process involves completing performance of outstanding contracts (or seeking termination or waiver from the other parties). The bigger liability piece, however, is notifying interested parties of the dissolution.
If the business is no longer operating (and therefore cash-flowing), creditors need an opportunity to settle your debts with them. In order to do so, they need to be properly notified. For known creditors (those who have actual claims, as well as those who have conditional, unmatured, or contingent claims on business assets), you must notify them directly. Proper notice by mail must:
- identify the claimant
- identify the claimant’s mailing address
- identify the deadline for asserting a claim (which must be at least 60 days after notice is given)
- state that the claim will be barred if not received by that deadline; and
- state that the company may make distributions to other claimants without further notice to the particular claimant
Proper due diligence dictates that this notice must also be posted on any websites that the company maintains, as well as recorded with the Secretary of State.
There may be creditors or claimants that you’re not aware of. For these unknown creditors, similar notice in a publication of general circulation in the county where the business’s principal office is located is sufficient. This publication must be run for at least two consecutive weeks to give creditors an opportunity to see it (this is called constructive notice).
Squaring Up Debts
Now that your creditors are lined up with their hands out, they’ve got to be paid. When a company doesn’t have enough cash on hand to pay its final debts, it must liquidate (sell) its assets. Assets may have liens or security interests on them. If this is true, the lienholder or secured party will have first priority to the proceeds of the sale of a particular secured asset. There may even be primary and secondary liens on an asset which must be settled in order of priority.
If there is capital left over after liquidating secured assets, the company is able to use those funds to settle the rest of its debts. Unsecured third-party creditors (meaning those who are not owners of the business) are the next to be paid. Then come the unsecured member creditors – business owners who have made capital loan contributions to the company.
At this point, the coffers are likely running low. If capital is exhausted with debts left to be paid, the veil of limited liability steps in to prevent loss to business owners’ personal assets. If there is capital left over, you’re free to distribute the surplus to owners under the terms of the operating agreement or bylaws (some owners might have distribution priority).
The Risks of Improper Dissolution
We stress the importance of following the letter of the law in matters of dissolution. The alternative is financial and legal exposure of the worst kind.
A company that properly dissolves winds up and acquits itself of the responsibilities it used to have. In the private sphere, this means completing or terminating contracts and otherwise “settling the score” with private parties. If your company has duties to perform under contract and they remain incomplete, the company is in breach – and must tap into its assets to cover the damages.
Failure to give notice has farther-reaching implications. By now, you’re familiar with the benefits of limited liability – that owners are generally not personally liable for the debts of the company. However, if you fail to give proper notice to creditors, you and your fellow owners can be liable up to the amount of surplus distributed to them during the winding up process (see “Squaring Up On Debts,” above). Worse, if you don’t have the records to prove what amount was distributed, liability is not capped – creditors can dip into your personal assets to satisfy their claims.
Neglecting to file your dissolution documents also opens the door to fines and potential litigation in both civil and criminal court. Your company’s paper trail must inevitably lead agencies to conclude that it’s been dissolved. If agencies can’t reach that conclusion, the business is still alive and well in their eyes; it’s still responsible for filing state and federal taxes and reports and making payments, too.
What happens when you don’t file taxes? That answer could fill another article, one that we hope you never have to read.
Action Items:
- Confirm your dissolution eligibility
- Identify the manager(s) responsible for “winding up”
- Close out contracts and resolve active litigation
- File dissolution documents with relevant agencies
- Notify creditors and claimants
- Pay creditors and claimants (with liquidated assets if need be)
- Distribute remaining profits to owners (if any)
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All the best,
