Dissolution of a Business

Businesses faced with persistent disagreement, negative business results, or simple disinterest may dissolve according to state law. Most states provide a variety of dissolution forms for different types of business interests. The proper procedure depends on the time and reason for the dissolution. In some instances, laws may prevent dissolution, and businesses must seek other solutions.

Dissolution before commencement of business involves a simple procedure that dissolves a new business before it opens its doors. The incorporators or the original board of directors can file a notice of dissolution to end the business before it even begins.

Dissolution by shareholder consent occurs when all shareholders agree to wrap up a business. Many states allow this type of procedure as long as a plan is made to protect creditor interests. Some laws require that the board take action to effectuate the dissolution in addition to the shareholders' decision. This type of dissolution is most common among closely held businesses.

Example: Elaine's Embroidered Epaulets, Inc. is losing money since the bottom fell out of the embroidered epaulet market. Although the company has no debt at this point, the shareholders do not want to risk any further financial losses. At a shareholder meeting, everyone agrees that the company should throw in the towel. Subsequently the board makes a resolution required by state law, and the business is dissolved.

Voluntary dissolution means that the board of directors approves the dissolution and a specified portion of the shareholders votes for the action. The applicable law may require a simple majority of the shareholders, or a larger percentage. This form parallels the procedure required for most corporate changes, such as acquisitions.

Involuntary dissolution may occur when dissension and deadlock persist and no buy-out agreement can be reached. Shareholders can bring a dissolution petition to the court for a judicial decree dissolving the company. The petitioner must show that legal grounds exist to dissolve the business, such as illegal, oppressive, or fraudulent action by the board; threatened or actual irreparable harm to the business; detriment to the shareholders; or misapplication or waste of corporate resources. Involuntary dissolution also may occur without judicial action by order of the secretary of state or other state official if the corporation fails to pay taxes, file reports, or follow other statutory requirements.

States may not allow dissolution if the action is unfair to minority shareholders. If majority shareholders freeze out the minority interests from the dissolution decision, courts may strike down the action. Legal standards on this issue vary widely from state to state.

After the dissolution decision is made, state law may require a filing of notice of intent to dissolve, and may mandate a period for settlement of corporate affairs. Creditors must receive notice of the impending action so that they may press their outstanding claims prior to the close of business. After any wind-up period and satisfaction of creditor and tax obligations, the company files final articles of dissolution with the state. Some states allow for an expedited procedure requiring only the final articles.

Legally, the corporation may continue for a specified period to deal with pre-dissolution claims. Creditors with unsatisfied debts, customers injured by defective products, or employees with residual disputes may bring actions against the legal shell of the corporation during this time. All claims must be made before statutory time limits run, so parties with disputes against dissolved businesses should seek legal assistance immediately.

Checklist: Dissolution and Winding Up

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Dissolution and Winding Up

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