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A Legal Guide For Dissolving A Business

Dissolving a business is a significant decision that involves various legal and financial considerations. Whether due to retirement, financial difficulties, or strategic realignment, understanding the process is crucial to ensure compliance with legal requirements and protect your interests.

Even if you have a strong business partnership arrangement, you can still benefit from working with a business formation lawyer to ensure that the dissolution runs smoothly.  Our friends from Volpe Law LLC provide an overview of dissolving a business to give you an idea of what to expect when changing your business structure.

Steps To Legally Dissolve A Business

While your specific experience may vary, the business dissolution process goes mostly like so:

  • Review Governing Documents: Start by reviewing your business’s governing documents, such as the articles of incorporation, operating agreement, or partnership agreement. These documents often contain specific procedures for dissolution, including voting requirements and notice provisions.
  • Board/Owner Approval: Obtain formal approval from the business’s board of directors or owners. For corporations, this typically involves a board resolution and, in some cases, a shareholder vote. For LLCs and partnerships, follow the procedures outlined in the operating or partnership agreement.
  • File Dissolution Documents: File the necessary dissolution forms with the state where your business is registered. For corporations and LLCs, this usually involves submitting articles of dissolution to the Secretary of State.
  • Notify Stakeholders: Inform all relevant stakeholders of the dissolution, including employees, customers, suppliers, and creditors.
  • Cancel Registrations, Permits, and Licenses: Cancel any business licenses, permits, and registrations that your business holds.

Handling Debts And Liabilities During Dissolution

  • Create a Plan: This plan should prioritize debts based on their legal standing, such as secured debts, unsecured debts, and contingent liabilities.
  • Notify Creditors: Legally notify creditors of the business dissolution and provide them with a timeframe to submit their claims.
  • Settle Debts: This may involve negotiating settlements with creditors or selling business assets to generate cash. Ensure that all settlements are documented in writing.
  • Handle Remaining Obligations: Address any remaining obligations, such as leases, contracts, and employee benefits. This may involve negotiating early termination of leases or ensuring final payroll and benefits are paid to employees.

Distributing Assets After Business Dissolution

Identify all business assets, including cash, equipment, inventory, and intellectual property. Liquidate these assets to generate funds for settling debts and making distributions to owners. This may involve selling assets at auction or to third parties.

Next, distribute the remaining assets according to the legal priority of claims. Generally, the order of priority is:

  • Secured creditors
  • Unsecured creditors
  • Preferred shareholders (if applicable)
  • Common shareholders or owners

File final federal, state, and local tax returns for the business. This includes paying any outstanding taxes and informing the IRS and state tax authorities of the business’s closure. Don’t forget to keep detailed records of the dissolution process, including notices to creditors, debt settlements, asset sales, and distributions. These records are essential for addressing any future legal or tax inquiries.

Dissolving a business involves careful planning and execution to ensure compliance with legal requirements and fair treatment of all stakeholders. By following the steps to legally dissolve a business, handling debts and liabilities responsibly, and distributing assets according to legal priorities, you can navigate the dissolution process smoothly and protect your interests.