Regardless of the reason, there sometimes comes a point when some corporations decide to call it quits.
But simply halting your business operations isn’t enough to actually end the corporation’s existence.
The corporation will continue existing as a legal business entity until you’ve formally dissolved the company.
Once you’ve legally dissolved the corporation, you can walk away knowing that everything has been settled correctly and start your next venture without any hindrance.
This guide will walk you through the step-by-step process of dissolving a corporation.
The Easy Parts of Dissolving a Corporation
Many business owners are intimidated by the dissolution process because they think it’s something they need to do alone. This simply isn’t the case.
To keep things simple and put your mind at ease, it’s recommended that you seek legal counsel. Retaining an attorney might seem like a big expense, especially if times are tough and you’re going out of business. But there are plenty of affordable online legal services you can use as you go through this process.
Do not go through the dissolution process without an attorney. You could end up with the raw end of the deal and leave yourself exposed to problems down the road.
With an online legal service like Rocket Lawyer, you can get fast answers to your legal questions regarding the dissolution process.
A Rocket Lawyer membership starts at just $39.99 per month. Members get legal questions answered at no cost and free 30-minute consultations for every new legal matter. If you hire an attorney through Rocket Lawyer, your membership gets you up to 40% off.
One of the most critical steps of dissolving a corporation involves filing paperwork with the Secretary of State. We’ll discuss this step in greater detail later on.
But this is another easy part of the dissolution process. The paperwork is easy to obtain, and in many cases, you can file everything online.
The Difficult Parts of Dissolving a Corporation
The psychological aspects of dissolving a corporation pose a big challenge for lots of business owners.
Deciding to end your company is hard enough. Many people struggle to go through the extra steps to formally dissolve the business once they’ve mentally checked out. They’ve already decided to walk away and don’t want to put in any extra work. They just want to put it behind them and move forward.
But the problem here is that the state and IRS will still recognize the corporation as a legal business entity. This means that you’re still responsible for taxes and subject to other legal requirements. Creditors and vendors can still come after you as well.
Another challenge of dissolving a corporation exists when board members aren’t on the same page. The corporation must go through a formal voting process on the dissolution, which could turn ugly if everyone doesn’t see eye-to-eye on the decision.
The entire process from start to finish can take weeks or potentially months to complete. You can’t wake up one morning, decide to end the business, and have it done before dinner.
Going through this lengthy process and taking several steps to formally dissolve a corporation can be frustrating, but it is worth it to dissolve the business legally.
Step 1 – Call a Board Meeting
The first thing you need to do is call a meeting with the board of directors for your corporation. Laws vary by state, but most states require an official vote from board members to approve the dissolution decision.
Even if this is not required in your state, it’s still wise to go through this process as a way to avoid legal blowback down the road.
For the vast majority of corporations, the corporate bylaws will require board approval for a decision like this.
Like any other board meeting, everything must be formally recorded with meeting minutes and kept with the corporation’s records. Remember, you’re still a legal business entity until the dissolution has been made official. So you can’t cut any corners here.
Assuming the board approves the decision, you must then turn over the vote to shareholders for approval.
Shareholder approval laws vary from state to state. In some jurisdictions, there is a two-thirds vote requirement from shareholders to approve the dissolution. Other states just require a majority rule.
Refer to your local laws and corporate bylaws to ensure everyone understands the requirements before votes are cast.
In some instances, the shareholder voting process will be much easier than in others. For smaller corporations, the board of directors might be the same people who hold primary shares in the company. But for larger corporations with lots of shareholders, the process might take a bit longer.
Shareholders need to understand that the dissolution is in their best interest. If this isn’t clear, getting a majority vote could be challenging.
Step 2 – File a Certificate of Dissolution
Once the board of directors and shareholders have voted to approve the dissolution, you can officially file the proper forms with the Secretary of State where the business is incorporated.
It should be pretty easy to obtain this paperwork. The exact name of the government agency in your state might vary slightly. Some states have a Corporation Agency while others call it a Corporation Commission or Incorporation Bureau—but they all do the same thing.
The name of the paperwork can vary as well. Sometimes the certificate of dissolution is also called the articles of dissolution.
Verify all of the fees and filing requirements before you submit the form. Depending on the state, you might be able to file by mail, online, or in person.
This is another scenario when it’s helpful to have fast legal counsel available to answer your questions. You can quickly go online and contact an attorney with Rocket Lawyer to ensure you’re handling this step correctly and following local guidelines.
Again, quick questions are free with your Rocket Lawyer membership.
In some jurisdictions, tax clearance is required before you can file the certificate of dissolution. So if your corporation owes back taxes, they must be paid before you can submit the paperwork.
Notifying creditors and resolving claims is also required in some states before you can file the dissolution papers. That’s why having an attorney guide you through this process is so helpful since the laws vary by location.
Step 3 – Notify the IRS
Once you’ve filed the dissolution forms with the state, you need to contact the Internal Revenue Service and inform them of your decision.
Ending your business doesn’t absolve you of tax liabilities. If you’ve been conducting business throughout the year, you still need to pay all of your state and federal taxes. For S corporations, the corporate income, losses, deductions, and credit can be passed through to shareholders’ individual returns.
For more information on the exact forms to file and the process required by the IRS, review this IRS resource for closing a corporation. Here’s a brief overview and summary of those requirements:
Income Tax Returns
C corps must file Form 1120 and report capital gains and losses on Schedule D (1120). S corps must file Form 1120-S and report gains and losses on Schedule D (1120-S).
When filing, you need to check the box that says “final return” for the tax year in which the corporation was dissolved.
If you’re liquidating stock, you must also file Form 966 for corporate dissolution or liquidation.
Along with forms 1120 or 1120-S, corporations need to file Form 4797 and Form 8594. These are necessary if the company’s property is sold or exchanged or if the business itself is sold.
If your corporation has employees, you need to make all final federal tax deposits. Failure to do so can result in penalties. Officers, employees, accountants, and anyone else who has the authority to spend business funds can be held responsible for unpaid employment taxes.
Form 941 must be filed for the quarter in which final wages were paid. Form 944 must be filed for the year in which final wages were paid.
You’ll also need to file Form 940 for FUTA in the year where final employment wages were paid. Check the box identifying that the form is final.
Just because your business is dissolving doesn’t exempt you from providing W-2s to your employees. So you’ll still need to file those papers for all wages paid to date in the year your corporation was dissolved.
If your company pays freelancers or contract workers, you still need to provide 1099s to any contract worker paid $600 or more during that calendar year.
Employer Identification Number (EIN)
When you first started the corporation, you obtained an EIN from the IRS. It’s a common misconception that EINs are terminated when a company dissolves—that’s not the case.
The EIN assigned to your business is permanent. This will never be given to another company, and you can use it at a later date if need be.
But you still need to close the tax account associated with your EIN. Mail a letter to:
Internal Revenue Service
Cincinnati, Ohio 45999
The letter should contain the corporation’s legal name, EIN, address, and why you’re closing the account. If you have a copy of the form sent when you first received the EIN, include that as well.
Step 4 – Close Your Accounts
Next, you need to close all of your business bank accounts and credit lines.
You should also cancel any business licenses, permits, or other similar accounts held in your company’s name. Failure to do this could leave you on the hook for annual fees.
For those of you operating your corporation in multiple states, you need to fill out any additional forms to terminate those registrations. Otherwise, your company could be responsible for minimum tax requirements in those jurisdictions.
Terminate DBAs or fictitious business names that you’re using as well.
You’ll need to officially notify all creditors that the corporation is dissolving. Send a letter including a mailing address that they can submit claims. Include a deadline for claim submissions—usually 120 days from the notice date.
Each letter to creditors should include a final statement saying all claims will be barred if they aren’t received by the deadline. You can have your attorney draft this statement for you to ensure you’re covered from a legal standpoint.
In some states, you might be required to put a notice in the local paper about your corporation dissolving. This is to inform all creditors that may not be known to the business.
If claims are sent during the time window stated in the letter, you need to settle those accounts. This is another instance where you should have an attorney review any claims to ensure creditors aren’t taking advantage of you.
Lots of times, creditors just want to be paid something—so you can potentially settle the claims for less than the original value.
If you’re rejecting claims, provide these rejections in the form of a written statement drafted by your lawyer.
Keep future business ventures in mind as you’re going through this process. You might be starting a new corporation down the road, so try not to burn any bridges during the dissolution.
Step 5 – Distribute Remaining Assets
Once your taxes have been paid, accounts have been closed, and claims are settled, it’s time to distribute the remaining assets to all owners.
Generally speaking, assets will be distributed by ownership percentage. If there are four equal owners, each person will receive 25% of the assets.
It’s usually easier to distribute assets once things have been liquidated. For example, if you have machinery or vehicles, splitting those between owners can be a hassle. The liquidation process could take some time, depending on what needs to be sold.
You must report all distributions to the Internal Revenue Service.
For those of you dissolving a corporation with multiple stock classes, the corporate bylaws should describe the procedure for distributing assets to shareholders.