How Companies Dissolve

August 11, 2023

A dissolved corporation ceases to (properly and/or legally) exist, and the effect this has on its shareholders depends on the way the company was dissolved.

One of many judgment articles: I am a judgment broker, not a lawyer, and this article is my opinion, please consult with a lawyer if you need legal advice.

Avoiding negative financial consequences for the shareholders, requires proper and quick dissolution of the corporation, which can be done with either voluntary, involuntary, or suspending procedures.

Voluntary Dissolution can happen when a corporation no longer serves its intended purpose. If a corporation is dissolved voluntarily and its assets are distributed to the shareholders, without paying all remaining corporate debts, the shareholders might become liable for those debts. If this happens, the shareholders should quickly and voluntarily dissolve the corporation, to avoid further expenses. This requires three basic steps:

1) Filing the appropriate documents with the state.

2) Wind up the business operations. An important part of winding up the corporation’s business operations is paying all outstanding debts and claims, including fees and taxes owed to any government agency.

3) Liquidating the remaining corporate assets and distributing them, if any, to the shareholders. Even with a voluntary dissolution of the corporation, it may have an adverse effect on the shareholders, especially if the business operations are not properly concluded.

State laws generally provide for a time period after a corporate dissolution, for creditors to sue the shareholders for failing to pay a corporate debt and/or wrongfully distributing corporate assets. For example, California has a four-year statute of limitation on such claims, and Delaware has a three-year time limit.

Generally, a shareholder’s liability for any remaining debts of the corporation is limited to the amount of corporate assets distributed to them. However, tax and payroll obligations might cause a shareholder to owe more, especially if the shareholder was an officer or director in the corporation.

An Involuntary Dissolution is when a corporation gets dissolved by a court order, after one or more of the corporation’s shareholders files a lawsuit requesting the dissolution. An example of how this situation can occur is if the relationship among one or more shareholders becomes hostile and prevents operation of the business.

An involuntary dissolution can be financially negative for the shareholders. In addition to paying legal fees and court costs for the lawsuit, the liquidation of the corporation’s assets using a court-ordered sheriff’s auction will most likely cause any remaining assets to be sold at a steep discount.

If the corporation is dissolved involuntary by the court, or administratively by the state, the shareholders may still pay additional liabilities and expenses.

In some states, a company can be administratively dissolved if it fails to comply with state filing or tax requirements. For example, most states will dissolve a corporation if it fails to file its annual report. Such a dissolution means that the corporation ceases to exist, and sometimes without the shareholders’ knowledge.

In administratively dissolved company situations, negative consequences can result, including the shareholders may become personally liable for all liabilities and debts incurred in the continued operation of the corporation’s business.

The IRS treats dissolutions as a distribution of assets to the shareholders; even if the assets are not liquid, and despite the fact that they did not intend to dissolve the corporation and make a distribution. This can cause tax issues for the shareholders.

If the company is suspended, someone, perhaps the shareholders, will have to wind up the business. Shareholders may incur more future liabilities if they fail to take the steps necessary to dissolve the corporation, to avoid future annual filing fees and paying fees to the state.

In some states, such as California, do not administratively dissolve corporations for failing to make these filings and payments, the corporation becomes suspended, however still exists.

In California, the suspended corporation stills exists and must continue with its yearly obligations, which will continue to accrue with penalties and interest each year that goes by without articles of dissolution being filed. The shareholders will not be able to file any new corporate articles until all back penalties, fees, and interest expenses gets paid.

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