Best Practice Summary
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termination of a corporation in its domestic state is called a dissolution which
may be voluntary or involuntary.
Involuntary Dissolution Process
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 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 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.
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
- 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,
to creditors and/or publication of a legal notice in certain newspapers prior
to the filing of a certificate of dissolution.
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.
law varies on the manner in which a corporations 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 firstname.lastname@example.org.
Liability Companies and Other Business Entities
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.
order to effect the cancellation of an LLC, you should consult the appropriate
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.
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 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.
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
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
for dissolution, withdrawals, certificates of revival and tax clearances may be
obtained at LeapLaw's 50 state pages.
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.
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