Dissolution
Best Practice Summary

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Corporations

The termination of a corporation in its domestic state is called a dissolution which may be voluntary or involuntary.

Involuntary Dissolution Process
Involuntary dissolutions may result from:

• Court Order: A court order that may be filed against a corporation because a court has determined that the corporation has "pierced the corporate veil". Piercing the corporate veil basically means stockholders have abused the legal protection of the corporation by using it for unlawful purposes and/or failing to supply adequate resources or observation of corporate formalities such as holding regular meetings of stockholders and directors, keeping separate record books of the corporation, distinguishing corporate assets from personal assets and stock issuance.
  
  
• Creditors: Creditors may also force involuntary dissolution or judicial dissolution in the event that the corporation is insolvent.
  
  
• Administrative Dissolution: The secretary of state of the state of incorporation may take action to involuntary dissolve a corporation for failure to (a) file annual reports; (b) pay franchise taxes; (c) appoint a registered agent; (d) failure to change the registered office within thirty day; and (e) certain fraud or abuse issues granted by law.

Voluntary Dissolution Process

Voluntary dissolutions may be either due to a predetermined dissolution date stated on the charter of the corporation or by an act of the Incorporator or stockholders and directors.

Check LeapLaw's 50 state pages for laws, forms, maximum stock for minimum filing fee and other state-specific basic incorporation information for all 50 states.

State laws of the state of incorporation provide for voluntary dissolution. Generally, if a corporation has no stockholders, the Incorporator may dissolve the corporation. If the corporation has stockholders, the directors recommend the dissolution to the stockholders. The stockholders take the vote required by law to proceed with dissolution. State laws of the state of incorporation must be checked in order to determine (1) whether vote of directors and stockholders may be taken by a meeting or via consent; (2) if votes may be taken by consent, what percentage of stockholder vote is required by law. LeapLaw's 50 state consent drafting chart may be helpful to determine if action may be taken by consent.

Once the necessary resolutions have been taken, the following documents typically complete the dissolution process:

• Draft a Plan of Liquidation or Dissolution as approved by directors and stockholders, if necessary.
  
  
• Request a tax clearance certificate or prepare a notice to the Department of Revenue
  (see LeapLaw's Tax Clearance Best Practice Summary for additional information)
  
  

  Note: Tax clearances can take months to obtain in some states, making for a long and drawn out dissolution process.

• Prepare a certificate of dissolution to be filed with the secretary of state. A tax clearance certificate may be required to be filed with this document.
  
  
• Prepare an IRS Form 966 with the Internal Revenue Service together with a Secretary's Certificate certifying the dissolution vote.
  
  
• Check to see if the company is qualified in any foreign jurisdictions. If so, withdrawals from each jurisdiction will be required. (See LeapLaw's Qualification and Withdrawals Best Practice Summary.
  
  
• In some cases, a notice to creditors and/or publication of a legal notice in certain newspapers prior to the filing of a certificate of dissolution.

Following the filing of the certificate of dissolution, the corporation no longer incurs corporate franchise taxes and other government-related debts. However, officers are usually empowered to wind up business as provided in the Plan of Liquidation (or Dissolution). The power includes the execution of withdrawal applications and doing all that is necessary to obtain necessary tax good standing certificates for withdrawal purposes.

Revivals

State law varies on the manner in which a corporation’s legal existence can be revived once it has been revoked. Some state statutes provide for revival simply by filing the past due annual reports, paying taxes and/or penalties to date. Other states require the filing of a certificate of revival together with any past due reports, taxes and/or fees. Some states require the company to re-qualify entirely. Specific state revival requirements can be found in LeapLaw's 50 state pages. Checking the status of a corporation in a state may also be done online in many cases at LeapLaw's Corporate Connection or by contacting the relevant secretary of state .

Need assistance? Virtual Paralegal Services provides paralegal services including preparation and filing services in all 50 states. For more information contact us at [email protected].

Limited Liability Companies and Other Business Entities

LLCs, limited partnerships and partnerships are generally easier to dissolve and require less steps. There is no IRS requirement to file the Form 966, therefore there is no requirement for a secretary's certificate or plan of liquidation since they are required by the IRS in corporate dissolutions only.

LLCs
In order to effect the cancellation of an LLC, you should consult the appropriate state laws first to determine if there are any statutory provisions regarding the dissolution. For LLCs, in many cases, there is no statutory requirement and the dissolution will be governed by the provisions set forth in the operating agreement (i.e. required vote of members). In absence of an operating agreement requirement, consult the attorney your working for to determine if a majority vote of members would suffice. A clean LLC dissolution will typically consist of a majority vote of members and the execution and filing of a Certificate of Cancellation or the state equivalent thereof.

Limited Partnerships
Limited Partnerships have statutory requirements as well. You should also check requirements provided in the limited partnership agreement. Typically, at least a consent of all partners, general and limited, will be required. Following the consent, a certificate of cancellation or the equivalent is filed with the secretary of state.

Partnerships
Partnerships may dissolve due to a death of a partner or other statutory provisions or provisions of the partnership agreement. When a dissolution is voluntary and voted upon in accordance to statutory provisions or the terms of the partnership agreement, the only filing requirement will be the cancellation of the business certificate that was filed in each jurisdiction.

Foreign Withdrawals
When a business files a dissolution or cancellation in its domestic state, it must still withdraw or notify each foreign state in which it has qualified or registered to do business. LeapLaw's Qualification and Withdrawal Best Practice Summary has more information regarding the withdrawal process.

Authority of Officers or Partners to Wind Up Business
Since part of the dissolution of any business entity is to wind up business, state statutes will typically provide for certain authority and liability of officers, managers and partners following the dissolution in order to wind up business, pay creditors and ultimately allocate the appropriate assets to the appropriate owner.

Forms

Forms for dissolution, withdrawals, certificates of revival and tax clearances may be obtained at LeapLaw's 50 state pages.

Record Keeping

Upon completion of the dissolution or cancellation, it is good practice to file all the dissolution/cancellation documents in the minute book or company records book placing the certified copy of the certificate of dissolution/cancellation in the front of the minute book to act as a tomb stone. This will alert those who come across the minute book that the company has been dissolved. If possible, after all withdrawals are complete (which may take months) the minute book should be sent to storage since following dissolution no activity should be taking place.

LeapLaw's
Best Practice Summaries

Filing Mechanics Qualifications and Withdrawals Service Companies Tax Good Standing Certificates