Dissolution is the process that leads to a formal end of a business entity.
Sometimes businesses file for dissolution voluntarily and other times
they are forced into dissolution.
Dissolution can be very stressful but there are actions you can take to
make this unfortunate (or maybe advantageous) end to your business less
stressful. Before starting a business, you should educate yourself on
the process and steps of dissolution: how to voluntarily file, in what
situations may dissolution be forced, how creditors are notified, who
to payout and in what order, etc. Next, depending on your chosen business
entity – you should make sure your operating agreements and/or bylaws
stipulate details regarding dissolution and are iron clad. If you have
no reference to dissolution in any of your business operating documents,
maybe you should go back over your documents and see where you can add
these clauses. A solid foundation will help you immensely when you have
to break down a business after you have built it up for so many years.
If you are unsure of what clauses to add or where to add them, you should
contact our firm and we can assist.
The following is the general process of dissolution from start to finish. The first step is an action that initiates the process of dissolution.
This could be a vote by shareholders/members, notification of the state
for forced dissolution, or the filing of bankruptcy. The second step is
filing the certificate of dissolution with the state your business is
incorporated. The third step is filing the appropriate tax documents with
the federal, state and local tax officials. Your tax obligations may not
end until the fiscal tax year ends – so make sure you are aware
and on top of any tax obligations you continue to have after dissolution.
If you are unsure about these tax obligations, contact a tax official
or trusted advisor. Fourth, you must notify your business creditors by
mail that your business has been dissolved or is intending on being dissolved.
With the notification you must also provide them with a mailing address
to send their claim(s) to, a list of information to be included in the
claim(s), a deadline for filing the claim(s) and a disclaimer noting that
any claim(s) received after the deadline will be barred. Fifth, you must
settle all creditor claim(s) received by the deadline specified in the
notification. Finally, you now distribute the remainder of your business
assets to company owners in proportion of their share of ownership.
As noted above, dissolution may occur voluntarily or forcibly – the
following is more information on this:
Voluntary dissolution may occur as a result of:
- Termination of entity duration.
- Internal Disputes. If members can't agree on operation, dissolution
may be the best option for the business before the business suffers further.
- Unprofitability. If the business is just not making as much money as expected,
the cost-benefit analysis may lead you to dissolution.
- Missions Accomplished. In other words, the purpose of the business entity
formation was satisfied and the business is no longer needed.
- Other personal or business objective achieved from dissolution of a business,
such as a new pursuit.
- Other cases provided by law or by constitutional instrument.
Forced dissolution may occur as a result of:
- Insolvability or interruption of the process of insolvability connected
with the insufficiency of debtor's assets.
- Some other illegal activity of the business.
Dissolution Agreements for Partnerships
A dissolution agreement is a document that formally ends a business partnership
with a clean slate. These agreements are used to avoid misunderstandings
and in most cases curb future lawsuits or claims against partners.
In that sense, these agreements are drafted for the mutual goals and benefit
of all partners – and when all partners are in a positive, hopeful
position. It is best to negotiate an end to a partnership based on the
realization of mutual goals and benefits than when all parties may be
scorned or emotionally unavailable based on partnership shortcomings or failures.
In the event the partnership is no longer needed, the agreement provides
each of the parties with a clean break from each other and legally absolves
either or multiple parties from any remaining obligations to the other
person(s) or the business itself. It not only terminates all parties'
commitments to the other partner(s) but to the business as a whole.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to