How to Dissolve a Corporation

You've poured your heart and soul into your corporation but now you’ve made the difficult choice to close the business. Maybe the company has become too much of a financial strain, or perhaps you've decided to pursue a different career or enjoy an early retirement. Whatever the case, there's more to dissolving a business than just closing your doors and shutting down operations.

There's a dissolution process you must follow. Just as you would file articles of incorporation to start your corporate entity and to bring it into existence, you must also file articles of dissolution (also known as a certificate of dissolution) to notify the state that you are terminating or dissolving the corporation.

We'll cover the steps on how to dissolve a corporation to ensure your business is compliant with state and federal laws.

What it means to close a corporation

Closing a corporation and winding up business operations is known as "dissolution," and when you're making the decision yourself, you must follow the voluntary dissolution process.

However, do not presume that the corporation is ended upon your halting of business operations. Legally speaking, your corporation continues to exist as a business entity regardless of whether or not you continue to conduct business operations.

Keep in mind, the state continues to expect the corporation to fulfill and to comply with all legal requirements until the time that the corporation has been dissolved formally. Therefore, it's important to understand the dissolution process and follow the required steps to ensure you properly close down your business.

How to dissolve a corporation in 7 steps

If you follow the right steps, dissolving your corporation doesn’t have to be a headache.

1. Consult legal and tax professionals

Learning how to close down a business involves understanding the ins and outs of your state’s business laws, and that's where consulting with professionals can help. For example, an attorney will provide you with state-specific requirements and help you avoid complications, while a tax professional can guide you through the tax process, ensuring you've paid the correct taxes and submitted the appropriate paperwork.

Though hiring these professionals isn't required, meeting with them can offer you invaluable legal advice and make the dissolution process run smoothly. At LegalZoom, we offer legal services to help you navigate closing your business.

2. Call a board meeting

Once you have decided to close the operations of a corporation, it is recommended that you hold a board of directors meeting to formally move to voluntarily dissolve the corporation. A vote must be taken and the minutes of the meeting must be recorded and retained in the records of the corporation in accordance with your corporate bylaws.

After the vote to dissolve has been approved by the board of directors, it must also be approved by a majority of the corporation shareholders (if there are shareholders). In certain states, a two-thirds vote is required to constitute a majority of shareholder approval. A majority of shareholders must approve of the intended dissolution and their vote represents their formal approval for dissolution.

The precise number of shareholders required to be considered a majority differs in each state. The written consent seeking dissolution and signed by all owners of the corporation must be completed before a request for dissolution will be approved by the Secretary of State.

3. File articles of dissolution with the Secretary of State

The next voluntary dissolution step involves filing paperwork with the Secretary of State's office to terminate your legal entity. This paperwork is called the articles of dissolution or the certificate of dissolution. The terms are used interchangeably to describe the document that informs the state that your legal entity is no longer in business.

Each state has its own rules and regulations regarding this process. For example, some states require that you notify creditors before filing, while others prefer that you file after that step. We recommend navigating to your state agency's website for specific instructions and additional information regarding how to file the forms and what filing fees you must pay.

Keep in mind that once you file your certificate, you can no longer conduct business.

4. Notify creditors and resolve debts

Now, it's time to notify creditors. You must send your creditors a written notice informing them of the closure of your business, which should include the date of your closure, your mailing address, and a deadline to file claims. If you cannot locate your creditors, or if you have unknown creditors, you can publish a notice in your local newspaper.

Sending this notification prevents your corporation from incurring more debts and allows the creditors to recover their debts.

At this point, you should also ensure you've paid your employees final wages, handled outstanding receivables, and determined the debts you've accrued.

5. Notify the Internal Revenue Service

Next, you must notify the Internal Revenue Service (IRS) to inform the agency of your intended company dissolution. You'll file Form 966, Corporate Dissolution or Liquidation with the Internal Revenue Service Center at the address where you file your income tax return.

It is important to pay taxes owed, both to the state and to the federal government, in order to obtain a "consent to dissolution" or a "tax clearance." The tax consequences of dissolving an S corporation or C corporation also involve reporting losses and gains on the final Income Tax Return. For an S corporation, you'll file Form 1120-S, U.S. Income Tax Return for an S Corporation, but if you're filing for a C corporation, you'll file Form 1120, U.S. Corporate Income Tax Return. On the state and local tax return documents, mark the box, "Final Return."

Generally, these forms are required by the Office of the Secretary of State to obtain formal dissolution of a corporation.

6. Liquidate assets

Liquidating your remaining assets is the next step. This means turning your remaining assets into cash.

Begin by identifying tangible and intangible property. Tangible property is the physical assets, like equipment, vehicles, and real estate, while intangible property can refer to your company name, trademarks, patents, and other aspects of your business that might be of value.

Once you've determined what you have, you can sell them to pay off debts and then distribute remaining assets to your shareholders.

7. Close business accounts, credit lines, and licenses

The final step is to close all bank accounts, credit lines, and service accounts held in your corporate or business name. Contact the financial institutions that oversee your bank accounts and credit cards to inform them of the business closing, ensure that you've paid your outstanding bills, and cancel your business account.

You will want to terminate all licenses, permits, and/or permits for your fictitious name, or doing business as (DBA), too. Notify the appropriate licensing agencies that you've closed your business. To cancel your DBA, you may need to contact the local or state office where you initially filed it.

Finally, be sure you notify all customers and vendors about your corporation’s dissolution.

If you’d like more guidance on how to dissolve a corporation, turn to LegalZoom. We offer dissolution services to help ensure you correctly and legally dissolve your business. 

Reasons to consider corporate dissolution

The following are some reasons why your corporation may need to consider corporate dissolution:

• The business is no longer profitable. You may not be making money, or you may even be losing money, so the company is no longer viable.
• There are unresolvable owner disputes. Shareholders or management have internal conflicts that result in dissolution outlined by the corporation's bylaws.
• The owners are leaving the company. The owners wish to retire or exit the business without continuing operations.
• There is a change in business structure. If you're converting from a corporation to a limited liability company, some states allow you to amend your business structure, while others require you to dissolve the original business entity.

FAQs 

How long does it take to dissolve a corporation?

The paperwork processing only takes a few days, but the other aspects of the dissolution process can take several weeks or months. This includes the time it takes to finalize business obligations, settle your debts, comply with state regulations, notify the IRS, and more.

Do I need to notify the IRS when dissolving a corporation?

Yes, you must notify the IRS when you're dissolving your corporation. To do so, you'll file your final income tax return and complete Form 966, Corporate Dissolution or Liquidation.

Can a dissolved corporation be reinstated?

It depends. Some states will allow you to reinstate your dissolved corporation, but only if it meets the criteria. For example, in the states that allow it, some have time limits on when they will allow the corporation to be reinstated. In Virginia, you must reinstate within five years, while in Illinois, you must reinstate within two years. Meanwhile, California doesn't allow dissolved corporations to be reinstated, meaning you must file as a new entity.

What happens to my EIN if I close a corporation?

Once you've been assigned an EIN, that number is forever yours. You will cancel your EIN with the IRS when you close your business, but the IRS won't reassign that number to anyone else.

Is the dissolution process different for foreign corporations?

Yes, dissolution is the process for domestic corporations, while withdrawal is the process for foreign corporations. Withdrawal means you want to terminate your business operations in another state. To do so, you must file the withdrawal application with the Secretary of State in that state and pay the associated filing fees.

Rebecca DeSimone, Esq. contributed to this article.