A Musical Guide to the End of Corporate Existence

When the shareholders of a corporation, or the members of an LLC, decide that the entity will stop actively engaging in business, they have a choice to make: officially dissolve the entity in accordance with statutory requirements, or simply do nothing, and instead let the entity “die on the vine” by failing to comply with annual filing requirements and file tax returns. While letting the entity slowly wither away may have some appeal in the short term, ultimately, it’s an unwise strategy.

Dissolve-Not Fade Away

When an entity fails to comply with annual filing requirements and to file tax returns, it dies a slow, agonizing death. First, the state starts sending notices, then serious-sounding mail summarizing the growing liability of the company with interest and penalties; ultimately, the company is suspended and the mail stops. By that point, however, substantial penalties and interest will have accrued.

Dissolution of an entity, by contrast, is quick and relatively painless. While the details of the correct procedures for dissolving a corporation or LLC differ somewhat from state to state, in all jurisdictions the shareholders or members must vote on a resolution to dissolve the company; file a Certificate of Dissolution with the Secretary of State; file a final tax return; and pay all taxes owed.

I’ll Feel a Whole Lot Better (When You’re Gone)

In addition to avoiding the financial liabilities that continue to accrue when a corporation is inactive, but not dissolved, proper dissolution also may start the running of a statute of limitations on imposing personal liability on the entity’s owners. For example, in California, a dissolved corporation’s shareholders cannot be sued, in their individual capacities, on any cause of action more than four years after the date the corporation’s certificate of dissolution was filed with the Secretary of State.

Breakin’ Up [Ain’t] Hard to Do

Dissolution doesn’t have to be complicated. A corporation or LLC considering dissolution should take the following steps:

1. If the entity is active and in good standing, follow your state’s applicable dissolution procedures (as mentioned above, these procedures usually involve, at a minimum, voting on a resolution to dissolve the company; filing a Certificate of Dissolution with the Secretary of State; filing a final tax return and paying all taxes owed);

2. If the entity is not in good standing, and it would require the payment of back taxes, fees, and interest to restore the entity’s active status so that it can dissolve properly, the entity should strongly consider following this course of action;

3. If the shareholders (of a corporation) or members (of an LLC) decide to allow the entity die on the vine, in order to avoid later disputes, the owners should:

a. sign a consent documenting that all owners agree to follow this strategy, which will eliminate the possibility of finger pointing if one of the owners later becomes unhappy about the threatening mail from the state documenting mounting penalties, interest, and fees; and

b. consider entering into an agreement that obligates each of the owners to ante up their share of cost (perhaps with a limit) if any of them faces unforeseen personal liability.

If you make sure to follow the proper procedures to dissolve (or at least protect yourself if you decide to let your company die on the vine), you’ll soon be Movin’ On.