How To Properly Dissolve A Company
Various reasons could lead to the dissolution of the business, such as bankruptcy, retirement, or change in career direction. When a business entity is no longer doing business, it is very important to follow the legal steps in "winding itself up" as a legal entity.
A Corporation or an LLC is an entity created under authority granted by the state. Hence, its existence may only be terminated by the state. Business law of each state provides a procedure for dissolving legal entities, however a legal entity can only be dissolved through formal action, not by a letter or phone call. The company remains liable for all taxes, assessments, fines, penalties and interest until it receives a Certificate of Dissolution from the Secretary of State or equivalent agency responsible for entity registration and record keeping.
When closing a business there are several typical actions that need to be taken on Federal and State levels, before the actual dissolution takes place. Typically, most of this is done using the help of an accountant you used for your business:
- You must file a federal tax return for the year it goes out of business (marked "FINAL").
- You must make final federal tax deposits.
- Report capital gains or losses.
- Report partner's/shareholder's shares.
- You must file the final employment tax returns.
- File final quarterly or annual employment tax form.
- Issue final wage and withholding information to employees.
- Report information from W-2s issued.
- File final tip income and allocated tips information return.
- File final employee pension/benefit plan.
- Issue payment information to sub-contractors.
- Report information from 1099s issued.
If you have employees:
STATE (where your entity is registered):
- If required, you must file a state tax return for the year it goes out of business.
- Make final State tax deposits.
- If you collect Sales Tax in your State, file final Sales Tax Return.
- If you have employees, you must file the final employment tax returns with your State.
- File final quarterly or annual employment tax form.
Proper Way to Dissolve a Company
First step is to hold a meeting of corporation's board of directors in which they need to propose a resolution for business closing ("Termination Proposal"). A vote must be taken and the minutes of the meeting must be recorded and retained in the corporate records. Then that proposed dissolution action must also be approved by majority shareholders. LLCs can issue Member Resolution regarding dissolution of the company, and have the necessary number of members sign it.
Second step is filing Articles of Dissolution with the secretary of state. The procedure varies from state to state - in some states this is done with a simple certificate while others require a more complex process.
Once you get approval from to state to dissolve your corporation/LLC, then company assets need to be distributed to its shareholders/members, and all financial (bank, credit) accounts need to be closed.
The company must notify each director and shareholder (or members of LLC), whether entitled to vote or not, of the proposed dissolution meeting. The notice must clearly state that the purpose of the meeting is to consider dissolving the entity.
The corporation/LLC will be withdrawn and its existence ended on the date the Certificate of Dissolution is filed and approved by the State. The Business Corporation Law does not permit the effective date of dissolution to be other than the date of filing of the Certificate of Dissolution by the State.
The Certificate of Dissolution must be signed by an officer, director, attorney-in-fact or a duly authorized person. The name and title of the signer must be typed or printed opposite the signature.
Advantages of Proper Dissolution
There are two main reasons why you should close the company officially even though it's no longer doing business:
Taxes and Fees:
As long as the legal entity exists it is liable to pay taxes and other fees. If you want to avoid those unnecessary expenses it is highly recommended to close the business according to the rules defined by the state and get your Certificate of Dissolution. Until you get it, your company will be held liable to file all relevant federal, state, and municipal tax returns. Failure to file these returns will result in the heavy penalties and fees associated with the late filing.
Even if you have already stopped your business operations, legally your corporation/LLC, directors, and officers (in some cases also shareholders/members) will be still considered as personally liable for certain aspects of the company business unless you file cancellation legally.
What Can We Help With
Once the financial and legal aspects (meetings) of the company dissolution are resolved, you need to perform the following, and our company can assist with all the items on that list:
- In some states, obtain consents from various departments (such as Labor, Finance, etc.)
- Close EIN account with the IRS.
- File Articles of Dissolution with Secretary of State or equivalent agency (depending on state).
- If relevant, notify your Registered Agent concerning company dissolution.
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We will prepare and file your dissolution application in a professional manner, and if necessary obtain consents from respective departments and close the EIN account with the IRS. We do all the work, all you need to do is complete our simple order form.
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