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 objectives 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:
- A court decision.
- 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!
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