Blog Post

So You Shut Down...Now What?

Timothy Oliver • Dec 08, 2017

Whether you happily unwound your business or begrudgingly shut your doors, you should consider a formal dissolution of your company when you decide to close-up-shop for good. Completing a formal dissolution follows through on the principle that you likely applied when forming your company to begin with: it maintains a shield for your personal liability from company debts.



In this article, I navigate the key steps to a formal dissolution of your corporation or limited liability company (“LLC”) that will enable you to move on to your next venture feeling confident that no lingering liabilities will follow. Keep in mind that while much of this article applies to other entity formations, certain ones, like professional service corporations, have their own nuances to dissolution.


Here is a summary of the steps to a formal dissolution for corporations and LLCs, followed by more detail below:

1)  Pay your Employees and Taxes.

2)  Notify the Secretary of State.

3)  Inform and Negotiate with your Creditors.

4)  Thoroughly Identify and Carefully Distribute your Assets.

5)  Cancel your Licenses and Terminate your Contracts.


But First! - Follow your Company’s own Guidelines.

Before you dive into the formal steps of dissolution, consult with your company’s organizational documents. Bylaws and Operating Agreements typically speak to how you may voluntarily dissolve your company, often including the number of owner votes required to dissolve, instructions for the wind-up process, and preferences for asset distribution. Don’t overlook these documents now, especially when you’re dealing with multiple owners who will undoubtedly be looking to get the most of the company’s remaining assets. If you fail to follow the procedures the owners agreed to when they set up the company, your dissolution may not in fact be valid!


1)   Pay your Employees and Taxes.

Paying your staff and taxes is paramount to a successful formal dissolution. You must pay your employees their wages, including base pay, overtime and other applicable compensation. Also, you must pay the IRS and Illinois Department of Revenue the withholdings, sales, use and other applicable taxes that your business collected.


Federal and state laws provide hefty penalties for company executives who bail on their company’s wage and tax obligations. Tell your accountant of your plans for dissolution so that he or she can prepare the final quarterly and annual tax forms. Taxes are non-dischargeable debts that can follow you personally for years after they were due with significant late fees if the IRS deems you the “responsible person.”


2)   Notify the Secretary of State.

A formal dissolution will not be complete without notifying the Secretary of State. For corporations, that means filing Articles of Dissolution detailing how the corporation authorized the dissolution and the status of the issued shares. LLCs meanwhile require a Statement of Termination which asks for little more than a forwarding address.


Note that with either entity, the Secretary of State will update your company’s status on its website to dissolved/inactive once it processes your dissolution forms. You’ll want to plan the rest of your dissolution in advance so that your creditors or other parties don’t find out by surprise of your dissolution before you’ve had the chance to notify them yourself.


3)   Inform and Negotiate with your Creditors.

Fortunately, you don’t need to file for bankruptcy to obtain relief from your company’s outstanding debts. In fact, both the Business Corporation Act (“BCA”) and Limited Liability Company Act (“LLCA”) provide a procedure that allows you to actually bar your creditors from pursuing company debts, similar to what a bankruptcy court would provide but without the administrative costs. But you must follow the procedures intently, which involves notifying creditors of your company’s dissolution and providing them with time to raise a “claim” for an unpaid debt with you.


Should a creditor not send you a claim – and provided you followed the procedure correctly – it’s barred from later pursuing the company debt. On the other hand, you’ll need to address any claims you actually receive within the 120 day period set forth in the BCA and LLCA. You do have the option to settle the debt or reject the claim; however, rejecting a claim may invite a lawsuit. Both the BCA and LLCA provide that a rejection notice triggers the start of a 90-day clock for the creditor to file suit against you, else lose its claim altogether. In either case, it’s better to address the debt up-front, where you can negotiate on presumably friendlier terms. It only takes one creditor to file a lawsuit that will cost you more in attorney’s fees in the long-run, even if your defense is successful.


4)   Thoroughly Identify and Carefully Distribute your Assets.

Most business owners don’t appreciate all of the assets that their companies obtain over the lifetime of their businesses. Some assets are easy to identify and value, such as cash in a bank account or company equipment. But others require a deeper analysis. Consider, for example, whether your company’s trade name or logo would be worth something to a former competitor. Think about whether your domain name for your website receives enough traffic to the point where someone may buy it from you rather than let its registration lapse. Don’t overlook assets that you could use to monetize and potentially resolve company debts.


Whatever assets you identify, take caution in distributing assets to company owners, or “insiders.” Both the BCA and LLCA require you to apply your assets first to creditors before distributing to owners and insiders. It’s common for one of the company’s founders to want to purchase a valuable asset, such as a patent, for use in a future venture. You’re allowed to sell assets to owners and insiders but you cannot grossly undervalue them in a “sweetheart” deal. There’s an inherent conflict between the owner’s or insider’s desire to get a great deal and your duty of loyalty to the company. If the sale doesn’t pass for sound business judgment or leaves the company unable to pay its debts, you may find yourself facing a lawsuit from another owner or a creditor.


5)   Cancel your Licenses and Terminate your Contracts.

For every company, there are more dissolution tasks than shutting off the lights and closing the bank account. Consider all licenses you’ve obtained to operate and determine what actions you must take with their respective agencies. Look at all services to which the company subscribes and figure out how to effectively cancel them without accruing more debt. If you rent property, review your lease to see how you can terminate your possession and tenancy, and be sure to check for any personal guarantees as those will follow you despite the company’s dissolution.

Remember: the fact that your company is dissolved may not insulate you from liability if you don’t properly dissolve the company. Plan ahead to minimize potential liabilities. Hire a professional with experience in closing companies if the process seems daunting. The costs of formally – and properly – dissolving your company could save you a lot more in the long-term.

       

Tim Oliver is an attorney and advisor for small-to-medium sized businesses. He helps clients address the many legal issues they encounter throughout a company’s lifetime. Tim brings to business dealings what he’s learned during his several years’ litigating business disputes. His clients appreciate his detailed plans and efficient work product. To learn more about Tim, visit www.ghulaw.com.

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