Articles of Dissolution: A General Guide
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Articles of dissolution are legal documents used to terminate the existence of a business entity, such as a corp. or LLC containing essentials about the entity. This includes its name, identification number, and the reason for dissolution. By filing articles of dissolution, the entity notifies stakeholders and regulatory authorities of its decision to cease operations, ensuring a transparent and orderly process for winding down affairs. The document requires the dissolution method and the signature of a member, manager, or another authorized person. All LLCs or corporate owners must agree to the dissolution. Articles of dissolution are not necessary to dissolve a sole proprietorship.
Steps to Close a Business
Here are the steps to take to close a business:
- File a final return and related forms.
- Take care of your employees.
- Pay the tax you owe.
- Report payments to contract workers.
- Cancel your EIN and close your IRS business account.
- Keep your records.
Let’s discuss the above points in detail. The process of closing a business mirrors the process of opening one. Like starting a business, ending your business begins by ensuring everyone is on board with its dissolution.
- Notification of Employees: The Federal Worker Adjustment and Retraining Notification (WARN) Act requires eligible employers to notify employees at least 60 days before mass layoffs or plant closings. The WARN Act does not apply to most small businesses. Many states, such as California, have versions of the act, which may be more restrictive than the federal act.
- Notification of Creditors and Vendors: Cancel contracts and leases according to their terms. For instance, if you have a lease on your building that requires you to give 60 days' notice, you must give the landlord 60 days or risk losing any deposit. You are also liable for paying the costs of breaking the lease. Contracts for goods or services should have cancellation clauses. They may also have liquidated damages clauses for breach or early termination.
- Payment of Final Tax: When you end a business, the company is still liable for any taxes for the prior and current year. This means you must continue making deductions from paychecks and payroll reporting obligations. You'll also be responsible for filing all final tax forms. You'll need to watch out for tax due dates that differ from the norm. For example, partnerships need to file a Form 1065. The IRS has income tax forms for the final year of a business. Limited liability companies and corporations have their forms for the final year.
- Cancellation of the EIN: Employers must file their final payroll taxes and make final tax deposits. After paying all taxes and closing all other business accounts, you must cancel your employer identification number (EIN). You can only do this once you file your final tax return with the IRS.
- Filing of Articles of Dissolution: If you filed articles of incorporation to start your business, you must file articles of dissolution to end it. You file these documents at the secretary of state's office. Filing a certificate of dissolution (also known as articles of dissolution) varies from state to state.
- Cancellation of Business Licenses: Cancel all business licenses and permits under your business name. Terminating business licenses and agreements helps keep you in good standing with other companies if you decide to establish a new business.
- Resolving All Financial Obligations and Collecting Money Owed: Notify lenders and other business entities you do business with and arrange continued payment of outstanding loans. You may want to negotiate payment or forgiveness during dissolution if you know your remaining assets will not cover your business debts.
- Selling and Distributing Your Assets: After you've settled the claims of your creditors, all that's left is the business assets, both tangible (e.g., business equipment or stocks) and intangible (trademarks and goodwill). The distribution of these assets is proportional to the stake of each owner in the business.
- Reminders After the Business Closes: The business bank account should stay open until all financial transactions are complete. Keep all business records for seven years. The Internal Revenue Service wants you to keep employment tax records for four years. Keep property tax records according to your state's statute of limitations laws. Most financial experts recommend seven years as a safe period for business records.
Importance of Articles of Dissolution
- Formal Termination: Articles of dissolution serve as a formal declaration of a business entity's intent to terminate its existence. Without these documents, the entity may be considered legally active, subjecting it to ongoing obligations and potential liabilities.
- Legal Requirement: In many jurisdictions, filing articles of dissolution is a legal requirement for ending the existence of a business entity. Failure to properly dissolve the entity through these formal procedures can result in legal consequences, such as continued tax obligations or potential lawsuits.
- Notification: Filing articles of dissolution provides a means of notifying various stakeholders, including creditors, customers, and regulatory authorities, about the decision to cease operations. This transparency helps ensure that interested parties are informed of the entity's status and can take appropriate actions.
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Frequently Asked Questions about Articles of Dissolution
1. Does a partnership have to do all this to shut down? What about a sole proprietorship?
Any company registered with your state's secretary of state needs to file dissolution documents. A sole proprietor registered as a limited partnership or professional limited liability company (PLLC) needs to carry out this process.
2. What happens if I just close up and walk away?
No matter your business structure, if you do not officially dissolve, you will still be liable for state taxes, requirements such as annual reports and filing fees, and other requirements under state law. The state may shut down your company if you are not doing business. You can also face fines and legal action in addition to catching the interest of the IRS.
3. What's the difference between dissolution and liquidation?
A liquidation or administrative dissolution occurs when the court takes over a failing business while it still has assets. The court may order a liquidation during bankruptcy proceedings. A liquidator sells off remaining business assets to pay creditors and business debts.
Key Terms for Articles of Dissolution
- Termination Articles: Legal documents formally ending the existence of a business entity.
- Entity Closure Declaration: Formal declaration of the closure and termination of a business entity.
- Cessation Articles: Documents outlining the cessation or termination of business activities.
- Corporate Dissolution Resolution: Official resolution by the company's board or shareholders to dissolve the corporation.
- Dissolution Certificate: Official certificate confirming the dissolution and termination of a business entity.
- Entity Wind-up Forms: Forms required to complete the winding up or liquidation process of a business entity.
Final Thoughts on Articles of Dissolution
Articles of dissolution serve as important legal documents that mark the formal termination of a business entity's existence. By filing these documents, businesses notify relevant stakeholders, including creditors, customers, and government agencies, about the cessation of their operations. Properly following the procedures for filing articles of dissolution is essential to ensure a smooth and lawful dissolution process, avoiding potential legal complications and liabilities for the business owners or shareholders. Formally filing articles of dissolution protects you and other owners of the business from future liability when exiting a business.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
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Articles of Dissolution
New York
Can a corporation file Articles of Dissolution if it still has outstanding liabilities?
I am the owner of a small corporation that is struggling financially and considering closing down. However, we still have outstanding liabilities, including unpaid debts and pending lawsuits. I have heard about the option of filing Articles of Dissolution to formally dissolve the corporation, but I'm unsure if it is legally permissible to do so while these liabilities exist. I want to understand the potential consequences and any legal requirements involved before proceeding with the dissolution process.
Damien B.
Hello. My name is Damien Bosco, Esq. My law office is located in Long Island City. In New York State, it is possible to dissolve a corporation even with known creditors and lawsuits. However, it is advisable not to do so during or pending litigation. Filing Articles of Dissolution does not eliminate creditor claims, lawsuits, or possible personal liability. Following specific requirements and procedures to comply with state law and minimize risks is crucial. Here's a best practice breakdown of how it works in New York: 1. Addressing Creditors - Notify known creditors about the intent to dissolve, allowing them to file claims to protect against future disputes. - Settle debts or make arrangements, which can involve negotiating settlements or creating payment plans. 2. Tax Clearance - Obtain a Consent to Dissolution from the New York State Department of Taxation and Finance by filing outstanding tax returns and paying any owed taxes. - Submit Form TR-960, "Consent to Dissolution Tax Clearance," to request consent. 3. Filing Articles of Dissolution - Prepare Articles of Dissolution according to New York Business Corporation Law (BCL) §1003. - Pay the required fee and submit the documents to the New York Department of State. 4. Dealing with Lawsuits - Existing lawsuits continue after dissolution, and creditors can pursue claims against remaining assets. - Proper notification and settlement efforts help reduce personal liability for corporate debts. 5. Post-Dissolution Responsibilities - Wind up the corporation by selling assets, distributing remaining assets, and resolving claims or lawsuits. - Following these steps is vital to avoid personal liability accusations during asset distribution. 6. Personal Liability Risks - Properly handling assets and following corporate formalities are essential to avoid being held personally liable for debts. - Bankruptcy may be a better option if liabilities exceed assets significantly. Practical Steps: - Work with a business attorney and accountant. - Address tax obligations and obtain tax clearance. - Notify creditors and file Articles of Dissolution. - Retain records for at least 6 years post-dissolution. If you need help with document drafting or understanding the dissolution process in New York, feel free to ask!
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