Company Dissolution   

Dissolution of a company is an essential process that legally terminates a business entity’s existence. Whether it’s winding down operations, paying off liabilities, or distributing remaining assets, the procedure involves several critical steps to ensure compliance with state regulations. Filing the correct paperwork, settling debts, and closing all financial accounts are just some of the necessary actions required for proper Company dissolution.

At Filings.ae, we provide comprehensive support to help business owners manage every aspect of the dissolution process, ensuring that all legal obligations are met and that your business closes without future complications.

Are you planning to close your company? Get expert assistance from Filings.ae and ensure a hassle-free, compliant closure of your business.

Company Dissolution

Company dissolution is the formal process of legally ending a corporation’s existence. It involves filing specific legal documents with the state, settling outstanding liabilities, and distributing remaining assets to shareholders. Once a company is dissolved, it is no longer recognised as an active business entity and is relieved from further tax obligations and reporting requirements. Proper dissolution helps business owners avoid future legal or financial liabilities associated with the entity.

Type of Company Dissolution

Business dissolution can occur in various ways.

• Involuntary dissolution

• Voluntary dissolution

Involuntary dissolution

One scenario is involuntary dissolution initiated by the state administrator overseeing business entities. This process forces a business to dissolve due to reasons such as failure to file annual reports, non-payment of certain state taxes, or failure to maintain a registered agent or office—commonly called administrative dissolution.

Voluntary dissolution

On the other hand, voluntary dissolution happens when business owners decide to end the existence of their company legally. This process involves filing Articles of Dissolution, which formally terminates the LLC or corporation in its state of incorporation or any other state where the business is registered to operate.

Why You Need to Dissolve Your Company?

Dissolving your company is necessary if you have decided to close your business and cease all operations permanently. When you created your company, you filed documents with the state. A similar process is required to dissolve it formally. If you skip this step, your company will continue to exist legally, even if you’re no longer conducting business, which can lead to ongoing legal obligations, tax liabilities, and compliance fees. Additionally, it can expose you to potential lawsuits and increased liabilities. By formally dissolving your company, you ensure that your business is closed in a legally compliant manner, protecting yourself from future risks and unnecessary expenses.

Steps to Properly Close a Company

Closing a company involves two key phases:

Dissolution

This is the first step, where the business owners vote to dissolve the company and file the necessary dissolution documents with the state.

Winding Up

After dissolution, the winding up process begins. This includes settling debts, distributing remaining assets, notifying creditors and customers of the closure, and closing all business accounts, licenses, registrations, and permits.

Each state has its own specific requirements for dissolving a business, so it’s advisable to consult with a Filings.ae experts to ensure compliance with your state’s regulations and to complete the process correctly.

Documents Required for Dissolution of Company

The following documents are required for dissolving your Company:

• Certificate of Incorporation

• Employer Identification Number (EIN)

• IRS Letter 147C

In addition to these, you may need the following documents for the dissolution of a company:

• Board Resolution Approving Dissolution

• Shareholders’ Consent/Resolution

• Certificate of Good Standing

• Final Tax Returns

• Certificate of Dissolution/Articles of Dissolution

• Tax Clearance Certificate

• Proof of Settled Debts and Liabilities

• Notice to Creditors and Customers

Procedure to Dissolve Your Company

To dissolve your company, follow the steps outlined below. Note that specific requirements may vary by state, so it’s essential to check your state’s dissolution laws for accurate guidance. At Filings.ae, our experts help you navigate the process seamlessly.

Step 1: Get approval from the Company Owners

Board Meeting and Resolution

The first step in dissolving a company is for the board of directors to hold a meeting and vote on a resolution to dissolve the business. This vote officially initiates the dissolution process. Depending on the requirements set by your articles of incorporation, bylaws, or state laws, a specific percentage of directors—such as a majority or two-thirds—must approve the resolution. While some states require a minimum vote, others allow the dissolution to proceed with less stringent approval from the board.

Notify Shareholders

After the board's resolution is passed, the next step is to inform the shareholders about the upcoming dissolution vote. 

Written notice must be sent to all shareholders a specified number of days before the vote.  

The notice should include:

• Date and time of the meeting

• Location of the meeting

Purpose of the meeting

Notice periods can vary by state, usually ranging from 10 to 60 days. Your company’s bylaws may specify how the notice should be delivered (e.g., certified mail). For C corporations, S corporations, or LLCs (Limited Liability Companies), it is essential to follow the procedures outlined in their governing documents to ensure compliance with state laws. In the case of LLCs, if the operating agreement does not specify a dissolution procedure, state LLC laws will dictate the process, which may have different requirements.

Step 2: Notify Customers and Employees

After making the decision to dissolve the business, it’s essential to inform those who will be affected. If possible, share a timeline indicating when business operations will cease. Remember, once you file for dissolution, you must stop all business activities, so ensure all operations are concluded before submitting the dissolution forms.

For Customers:

• Review any outstanding accounts receivable and make a final effort to collect payments.

• Address any ongoing projects or orders; ensure you resolve these matters or collaborate with customers to find a suitable compromise if you cannot complete them.

For Employees:

• Clearly communicate when their shifts will end and outline the timeline for the final payroll cycle.

Step 3: File a Certificate of Dissolution with the State

Once shareholders or members have approved the dissolution, the formal process of dissolving the business must begin at the state level.

Contact the State Authorities

Corporations and LLCs must contact the Secretary of State’s office to request the necessary forms to dissolve the entity.

• Some states have a Bureau of Incorporation or a specific business division that handles dissolutions. Check the appropriate division for the state you’re incorporated in.

• LLCs may need to file different forms depending on the state. For example, in Pennsylvania, corporations file a Certificate of Dissolution, while LLCs file a Certificate of Termination.

Filing Requirements:

• File the appropriate paperwork in the state of incorporation and any other states where the business is qualified to operate.

• The process for filing Articles of Dissolution (or Certificate of Dissolution) varies by state. Some states require filing before notifying creditors and settling claims, while others require filing afterwards.

• If your business is a nonprofit, you may need approval from the state’s Attorney General before filing.

Tax Clearance

Some states require tax clearance before filing the Certificate of Dissolution. Any outstanding taxes owed by the corporation or LLC must be paid before proceeding.

Step 4: Prepare and File Final Tax Returns

As part of dissolving your business, you must file a final tax return.

Final Tax Returns:

• On Form 1120 (C corporation tax return), Form 1120-S (S corporation tax return), and Form 1065 (LLC taxed as a partnership), check the box indicating it is the final return.
• Form 1120-S and Form 1065 also indicate that it is the final Schedule K-1.

Additional Filing Requirements:

• Form 966: Must be filed for dissolution or liquidation and should be submitted within 30 days of adopting the dissolution plan.

• Form 4797: Required if you sell or exchange business property as part of the dissolution process.

Step 5: Prepare and File Information Returns

Information returns are forms submitted to the IRS to provide necessary details about financial transactions rather than to report any taxes owed.

One common example is Form 1099-NEC, which reports compensation to non-employees. You must file this form if you hired contract workers and paid them more than $600 during the tax year. Filing these forms ensures compliance with IRS requirements and accurate record-keeping for your business.

Step 6: Pay Any Outstanding Taxes Owed

When dissolving a company, it's important to settle any outstanding tax liabilities. The two most common taxes that need to be paid are corporate income taxes and employment taxes.

Corporate Income Taxes:

• Calculate your final federal tax liability on the last tax return you file. This amount must be paid directly to the IRS.

• In addition to federal corporate income taxes, most states impose their own corporate income tax, which will also need to be paid.

Employment Taxes:

• Employment taxes should be filed using either Form 941 (Employer’s Quarterly Federal Tax Return) or Form 944 (Employer’s Annual Federal Tax Return).

• Use Form 944 if your annual liability is $1,000 or less. Generally, you should continue using the form you've previously filed.

Federal Unemployment Taxes:

• File Form 940 to calculate and pay your final federal unemployment tax (FUTA) liability.

• Ensure that all federal and state tax obligations are fulfilled to avoid any penalties or legal complications during the dissolution process.

Step 7: Close Your IRS Business Account

You need to send a written letter to formally notify the IRS of your dissolved corporation and close your business account. The letter should include the following details:

• Complete Legal Name of the business entity.

• Employer Identification Number (EIN).

• Business Address.

• Reason for Closing the Account (e.g., dissolution of the company).

• Sending this letter ensures that your business account with the IRS is properly closed and prevents future tax correspondence for the dissolved entity.

Clarification on Closing an EIN (Employer Identification Number)

There's a widespread misunderstanding that an Employer Identification Number (EIN) can be cancelled or closed when a business is dissolved. However, the IRS does not cancel an EIN once it has been issued. This number remains the permanent federal taxpayer identification for the business to which it was assigned.

• To close your business account associated with an EIN, you need to send a letter to the IRS that includes the details mentioned above:

• Additionally, if available, you can attach a copy of the EIN Assignment Notice you received when your EIN was issued.

Remember that an EIN is never reused or reassigned to another business. Even if it was never utilised to file federal tax returns, it remains associated with the business entity indefinitely and can be reactivated if needed.

Step 8: Close Business Accounts

Ensure that all business accounts, licenses, and permits are properly closed to complete the dissolution process. This includes reviewing and closing any of the following:

• Bank Accounts

• Credit Cards

• Lines of Credit

• Business Licenses

• Business Permits

Additionally, settle any outstanding debts and prepare to distribute any remaining assets to shareholders or company members. This step helps avoid future liabilities and ensures a clean business closure.

Step 9: File Your Records for Safekeeping

Even after dissolving your company, it’s essential to keep your business records organised and accessible. The IRS and state offices may request certain documents or reports years after the dissolution process.

• Keep Both Physical and Digital Copies: Store documents securely and consider using a cloud storage solution for digital backups.

• Retention Periods: The IRS can request some forms up to three years after dissolution.

Certain documents may be required indefinitely, so maintain records beyond the standard retention period.

Proper recordkeeping ensures that you’re prepared to respond to any future inquiries or audits, protecting you from potential legal or compliance issues.

Liquidating Assets

The process of liquidating assets involves converting any tangible or intangible assets into cash that can be distributed to shareholders or owners.

• Tangible Assets: Examples include equipment, office furniture, real estate, and vehicles.

• Intangible Assets: Examples include intellectual property such as copyrights, patents, and trademarks.

These assets are sold at either a gain or a loss, which is determined based on the asset's tax basis, not its original purchase price. The tax basis is calculated by taking the original purchase price and adjusting it for any amortisation or depreciation.

As part of the liquidation process, you must file Form 966 with the IRS to report the company dissolution or liquidation. This ensures compliance and provides the IRS with the necessary information regarding the disposal of assets.

How to Liquidate Your Assets

When liquidating assets, follow these steps to ensure a smooth process and maximise returns:

• Create a Detailed Asset List: Start by creating an inventory of all tangible and intangible assets that will be liquidated. Document each asset, noting its description, condition, and the amount obtained from its sale.

• Document All Transactions: Clearly record each exchange, including the value paid and the buyer information, to maintain accurate records for tax and compliance purposes.

• Choose the Right Selling Platform: Use industry-specific auction or exchange websites to find suitable buyers for specialised equipment or assets. For general items, platforms like eBay or Craigslist can be effective.

• Sell Intangible Assets: Consider competitors or related businesses as potential buyers for intangible assets like intellectual property, customer lists, or ongoing projects.

• Consider Private Sales vs. Professional Help: Private sales often yield higher returns, but working with a business broker or professional liquidator can simplify the process and reduce stress.

• Selling to Owners or Shareholders: Be cautious when selling assets to business owners, members, or shareholders. Check the articles of incorporation, operating agreements, or bylaws to ensure these transactions are permitted.

• Explore Charitable Donations: If certain assets are hard to sell, consider donating them to charity. This can result in tax deductions, reducing your final tax liability.

• Handle Unpaid Invoices: For any outstanding accounts receivable, look into invoice factoring. This allows you to sell unpaid invoices to a factor for immediate cash while they take over the collections process.

By following these steps, you can effectively liquidate your business assets and close off financial obligations, making the dissolution process smoother and more efficient.

Why Choose Filings.ae for Company Dissolution?

Choosing Filings.ae for the dissolution of your corporation means partnering with a team of experts who understand the intricacies of business closure and compliance. Our experienced professionals handle every step of the dissolution process—from filing the necessary paperwork and notifying the relevant authorities to ensure that all legal and financial obligations are met. We provide personalised guidance tailored to your business needs, helping you navigate complex regulations easily and confidently. With Filings.ae, you can ensure a smooth, hassle-free dissolution that protects you from future liabilities and allows you to focus on your next venture.  

Ready to dissolve your company with ease? Contact Filings.ae today and let our experts handle the process for a smooth, compliant, and stress-free closure!