For any number of reasons, companies’ leaders may come to the conclusion that running their business no longer makes practical or financial sense. The corporation’s board of directors decides that the business should be wound down, or dissolved, rather than sold to the highest bidder.
However, before starting such a process, business owners and/or board members have to determine the best legal approach. While a Chapter 7 liquidation bankruptcy or Chapter 11 reorganization bankruptcy might be appropriate, a voluntary dissolution can be a less expensive alternative. This is true especially when litigation or disputes over claims are unlikely.
There are two typical scenarios in which companies can benefit from the dissolution process:
- The company anticipates being able to pay creditors in full and to return some funds to shareholders
- The business is insolvent, but creditors are generally cooperative.
If the corporation has a bank or other secured creditor willing to work with the corporation to liquidate the assets without a foreclosure, a voluntary dissolution is much facilitated. Additionally, a properly conducted dissolution process can bar late claims against the corporation and provide directors with protection from personal liability to claimants.
How Does Dissolution Work?
The laws of the state of incorporation control the dissolution process. In Delaware, where many businesses are incorporated, the law allows for a voluntary dissolution through a stockholder vote. The process generally involves the following steps:
- The board of directors approve of the dissolution and a liquidation plan.
- If shares have been issued, a majority of the outstanding shareholders need to approve the dissolution in a written resolution.
- Filing of a Delaware Franchise Tax Report and payment of any outstanding franchise taxes owed to the state.
- Filing a Certificate of Dissolution with the State of Delaware. If the corporation has ceased transacting business and does not have any remaining assets, it might qualify for the short form Certificate of Dissolution.
- Within 30 days of the board of directors’ approval of dissolution, a notice of dissolution must be filed with the Internal Revenue Service (known as Form 966). If the dissolution involves the sale or exchange of corporate assets, Forms 8594 and 4797 might also be necessary.
- Begin a formal claims process, giving creditors at least 60 days’ notice of the dissolution and inform them of the deadline for filing claims.
- Review the filed claims for decision-making: Make offers to claimants or reject claims.
- Resolve outstanding lawsuits, including any which might have been filed by claimants whose claims the company rejected.
- Liquidation of all remaining corporate assets as laid out in the plan of liquidation.
- File a final state and federal tax return for the corporation. The form should indicate that this is the final return for the corporation.
- If the corporation is registered to do business in another state, it will have to withdraw or surrender those qualifications.
- Make final distributions to creditors and, if able, to the applicable stockholders.
This is the process for the state of Delaware and other states have different, shorter or longer processes. Thus, as with most corporate matters, any corporation considering dissolution should consult with a qualified corporate dissolution attorney and tax professional to get advice customized to the corporation’s particular situation and needs.