Dissolving A Business

Dissolving a Business Whether a sole proprietor, partnership, limited liability company (LLC) or a corporation, the following guidelines should help you cover the basics of closing a business.


If the business is a sole proprietorship, typically business organizational documents are not necessary to close the business. It’s an unwelcome event, but it’s a decision made by the owner, without the need to consult with partners or board members. If the business is a general partnership that does not have a written partnership agreement, then typically all that is required is that the exiting partner gives notice to the other partner of their express desire to withdraw from the partnership. Doing this in writing is the best method. If the business is a partnership with a written Agreement, LLC, or a corporation then the rules of dissolution in the partnership agreement, articles of incorporation, operating agreement, or state law will need to be followed. For small businesses, shareholders or members are often involved in day-to-day operations, and typically know the circumstances. Regardless, business owners must approve the dissolution of the business. With corporations, the shareholders must approve the action; with limited liability companies (LLCs), members grant approval. The bylaws of a corporation and the LLC operating agreement typically outline the dissolution process and needed approvals. To comply with corporation formalities, the board of directors should draft and approve the resolution to dissolve. Shareholders then vote on the director-approved resolution. Both actions should be documented and placed in the corporate record book. While LLCs are not subject to the same formalities, documenting the decision and member approval is recommended.


Sole proprietorships typically do not have to file anything with the state. But any outstanding issues with creditors, suppliers, and customers should be resolved. General partnerships that filed with the state at the inception of the partnership must file dissolution papers with the state. By filing dissolution papers with the state, creditors are put on notice that the business cannot incur any further business debt. Because partners are personally liable for business debts of the partnership, and any partner can make decisions that obligate the partnership, if the intent is to end the partnership, giving notice informs the state that partners can’t burden the partnership with further obligations or debt. LLC’s and corporations require a few more steps. Typically, once the members or shareholders have voted to dissolve an LLC or corporation, the appropriate paperwork with the state of organization or incorporation must be filed. If the business qualified to transact business in other states, paperwork must be filed in those states, too. This paperwork essentially certifies the member's or shareholders' decision to terminate the business. The paperwork that needs to be filed is usually referred to as a Certificate of Dissolution or Articles of Dissolution. Typically this filing this certificate must be done before notifying creditors. After the Certificate of Dissolution has been filed with the state, the business’s known and unknown creditors must be notified of the dissolution.


Although the business operations are ending, the business's tax obligations do not immediately cease. The business is still liable for any taxes for the prior and current year and therefore the business must formalize its closing to the IRS as well as state and local taxing agencies. The IRS website includes a business closing checklist, which indicates the required forms and links to additional state and local requirements. Consulting with an accountant or tax adviser will aid in conforming to particular requirements. In addition to reporting to local, state, and federal tax agencies, filing paperwork for other local agencies to terminate business licenses or permits is also recommended. By canceling licenses and permits, it will help to prevent others from wrongfully using any business accounts or names on the business that may lead to the business incurring additional taxes or penalties.


Whether the business is a partnership, LLC, or corporation, businesses have an obligation to creditors to inform them of an impending closing. The business will need to inform lenders, insurers, suppliers, vendors, and service providers that the business will no longer be contracting for their services and give a method as to how the business intends to wind up its agreements with those creditors. For LLC’s and corporations, typically must notify all of the business’s creditors by mail, and explain: a. That the corporation or LLC has been dissolved or has filed the statement of intent to dissolve b. The mailing address to which creditors must send their claim(s) c. A list of the information that should be included in the claim d. The deadline for submitting claims (often 120 days from the date of the notice) e. A statement that claims will be barred if not received by the deadline The state allows for claims from creditors that are not known to the business at the time of dissolution. This requires that a notice be placed in the local paper about the business’s dissolution.


Once the business gets claims from creditors, they will need to inspected and either accepted or rejected. Accepted claims must be paid or satisfactory arrangements made with creditors for repayment. For example, a creditor may agree to settle the claim for less (such as 80%) than the original amount. With rejected claims, the business must advise creditors in writing that the business rejects their claims. Be sure to have an attorney assist and advise the business about the process and the state’s related statutes.


After the business has settled the claims of its creditors, all that’s left is the business assets, both tangible (e.g., business equipment or stocks) and intangible (trademarks and goodwill). Typically, the distribution of these assets remains proportional to the stake of each owner in the business. After paying claims, remaining assets may be distributed to business owners in proportion to the share of ownership. For example, if “Member A” owns 80% of the business and “Member B” owns 20%, Member A will receive 80% of the remaining assets. These distributions must be reported to the IRS. If the corporation has multiple stock classes, corporate bylaws typically outline the procedure for distributing assets to these shareholders. Meet with a Business Attorney Before You Dissolve Your Business Finding the right attorney to help you dissolve your business is just as important as working with the right attorney when starting it. There are numerous critical steps involved when dissolving a business, so finding a qualified small business attorney is important.