- What does it mean to dissolve a business?
- What are articles of dissolution?
- What’s the difference between voluntary and involuntary dissolution?
- What should I do before I file for dissolution?
- Dissolving as a corporation versus an LLC.
- How can a business dissolution be a positive part of my entrepreneurial journey?
It’s not unusual to hear entrepreneurs refer to their small business as their baby. Small businesses go through many life cycles under the care and supervision of their owner. There’s the startup stage, which is a lot like infancy. You prepared as much as you could for this moment by drafting a business plan, raising capital, and incorporating or forming an LLC for added liability protection. However, much like parenthood, there are still plenty of moments where you don’t always know what’s coming next and let your gut instinct take the lead. Blink, and the next thing you know, your startup is a few years old and a full-fledged business. The company has grown up right before your eyes. Sometimes the business continues to grow. Other times, it has a shorter life cycle than anticipated and must be dissolved.
Going into this series, I knew I could not write strictly on the formalities of business dissolution alone. Closing a business is an incredibly emotional experience for entrepreneurs. Maybe you had your doors open for six months or two years. Maybe it was several decades. Even if the reason for closing the business is positive, it can still be difficult to say goodbye. However, it’s important that you understand business dissolutions and can move forward to remain in good standing with the state.
What is a business dissolution?
A business dissolution is a formal closure of a business with the state. A small business cannot hang up a “closed” or “out of business” sign outside their storefront, turn off the lights, and lock their doors to be considered a dissolved business. Small businesses that have formed a corporation or LLC must fully terminate the existence of their business by filing articles of dissolution with the state.
Articles of Dissolution
Articles of dissolution are sometimes referred to a certificate of dissolution or certificate of cancellation. When a small business files articles of dissolution, they are officially notifying their local Secretary of State that the business is formally closed.
What happens if your corporation or LLC does not file articles of dissolution? Then the business is still considered, in the eyes of the state, to be active. This is even true of small businesses that haven’t done any business in months.
Because the company is still in existence, it must remain in compliance with the state. This means filing an annual report, paying filing fees, and paying state taxes. Again, this is all required to remain in good standing — even if you didn’t do any business. Once you have filed articles of dissolutions, the business is considered formally closed. As a result, you no longer have obligations to the state.
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Voluntary and Involuntary Dissolution
Not all businesses dissolve in the same manner. Voluntary dissolutions are generally situations where the entrepreneur decides to close the business on their own accord. The business, however, tends to be in good standing for a voluntary dissolution.
Involuntary dissolution, on the other hand, is a situation where the business has fallen into bad standing with the state. It’s possible that your business may lapse into bad standing if the following occurs:
- Neglecting to file an annual report in a timely manner
- A check for a filing fee bounced and was never replaced
- Accidentally forgetting to pay franchise taxes by their deadline
Once your small business has fallen into bad standing, it may be involuntarily dissolved by the state. This means the existence of the business has been terminated, even if you didn’t mean for it to happen. The good news is a business that is involuntarily dissolved may file for reinstatement. We’ll cover more about how that works as our business dissolution series progresses.
Preparation Before Dissolving the Business
Consider your entity before obtaining articles of dissolution and dissolving the business. There’s a little bit of preparation a corporation or LLC must go through before they can formally shut their doors.
- Corporation: You’ll need to take an official vote before moving forward with the business dissolution. This means scheduling a meeting with the board of directors and taking and recording minutes. The dissolution must be approved by the majority of shareholders. If the vote does not pass, your business does not secure the shareholder vote and cannot be dissolved. However, if enough shareholders vote to dissolve the business you may move forward with your plans. If your business happens to be a public corporation, keep in mind that many states require these corporations to create a dissolution proposal. This is a formal announcement that the corporation intends to dissolve. An additional statement is included that the majority vote agreed to the proposal, which is made part of public record.
- LLC: It’s a slightly similar situation for this entity as well. Members of the LLC must meet, take and record minutes, and have a formal vote. If the majority vote is met, the LLC may dissolve the business. Remember to document the dissolution in the LLC operating agreement, too.
Can business dissolutions be a positive part of the entrepreneurial journey?
It’s easy to see dissolving a business as a bittersweet moment in your startup journey. The great idea you worked so hard to build is now closing its doors. If anything, you’re probably flashing back to memories of your “greatest hits” in business.
Consider the key word in that sentence: build. It may be dissolved, but you built this business from the ground up. You brought a dream into reality. That took courage, faith, and a lot of hard work. Dissolving a business is actually an incredibly positive part of your entrepreneurial journey. After all, you brought one business into the world successfully. What other ideas do you have up your sleeve? Maybe it’s time to start a business based on those ventures. You know you can do it!
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.