How to Dissolve a Corporation

How to Dissolve a Corporation

A corporation is an independent legal entity, separate from its owners, A.K.A. shareholders. This independence gives the shareholders limited liability for the debts of the company and lets them easily transfer their shares in the business. However, when a corporation decides to dissolve (meaning ceasing operations) it must undergo a process to terminate its independent legal status. Corporations are regulated under state law, so this dissolution process can vary. While it can vary, there are some steps that every corporation must take.

Shareholder Vote

The process of dissolving a corporation begins by working with the shareholders to approve the termination of the corporation. Usually, the board of directors discusses and proposes a resolution for dissolution. If the board agrees on the dissolution process, it then presents the resolution to the corporation’s shareholders for a vote.

Wrapping Up Business

If the shareholders agree to terminate the corporation it does not mean that the entity instantly stops. It is common that most states require that the corporation “wraps-up” its business. Two things are required of the corporation. First, all corporate creditors must be notified of the dissolution. This ensures that all corporate liabilities are paid prior to the termination of the business. Second, the corporation must complete all its outstanding contracts regarding sales of its goods and service, however, it cannot enter into new contracts. This process generally finishes when the corporation gathers and sells all the assets that it does not plan to distribute to shareholders.

State Filings

The articles of dissolution is document that a corporation looking to dissolve its entities must file with the state in which it was originally formed. These articles are a formal termination of the corporation. The articles describe how the corporation plans to distribute what is left of its assets to its shareholders. The articles are usually filed with the secretary of state.

Distributing Assets

The remaining assets are distributed to shareholders based on how many shares they owned. For example, if a shareholder-owned 25 percent of the outstanding stock, he would get 25 percent of the remaining corporate assets. In order to report the distributions, the corporation must file Form 1099-DIV with the IRS and its former shareholders.

Tax Implications

The dissolved corporation must also file its final tax return. When this is done, it should detail the last of the financial activity. Also, the corporation cannot forget to check the “final return” box in Item E of the return. Finally, the corporation needs to cancel its Employer Identification Number. This can be done by sending a letter to the IRS stating that it is dissolving and it no longer requires an EIN.