How to Deal With a Partner Who Will Not Dissolve a Corporation

By Joe Stone

Dissolving your corporation is a necessary step in the process of winding up your business and ceasing operations. If your business partner disagrees with your decision to dissolve the corporation, the state law where the corporation was formed will govern the options available to you. Depending on your situation, a shareholder vote may resolve the issue, or you may have to file a lawsuit to force dissolution.

Dissolving your corporation is a necessary step in the process of winding up your business and ceasing operations. If your business partner disagrees with your decision to dissolve the corporation, the state law where the corporation was formed will govern the options available to you. Depending on your situation, a shareholder vote may resolve the issue, or you may have to file a lawsuit to force dissolution.

Voluntary Dissolution

The corporate laws of each state require that a voluntary dissolution of a corporation be approved by the corporation's shareholders. Unless the corporation's bylaws or articles of incorporation state otherwise, state law generally permits dissolution of the corporation on a simple majority vote. For example, California law gives shareholders with 50 percent or more of the voting power the right to dissolve the corporation. Delaware law also permits dissolution on a majority vote of the shareholders, but first requires the board of directors to adopt a resolution for dissolution. If you own 50 percent or more of the shares of your corporation, you should review the laws of you state for the appropriate steps to take to authorize a dissolution based on a majority shareholder vote.

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Involuntary Dissolution

If your situation does not permit a voluntary dissolution based on majority shareholder approval, an involuntary dissolution by the court may be an available option. Taking this approach requires filing a lawsuit requesting that the court make appropriate orders to dissolve the corporation. In most cases, the court will appoint a receiver to assume control of the corporation for purposes of liquidating its assets, resolving all debts and liabilities, and distributing the remaining assets to the shareholders. Whether you have the right to sue for involuntary dissolution depends on state law. Such a remedy is not available in all states, most notably Delaware.

Factors Complicating Involuntary Dissolution

In states that permit involuntary dissolution, special rules may apply that affect the lawsuit. For example, in California if a minority shareholder files the involuntary dissolution lawsuit, a shareholder with 50 percent or more in voting power can purchase the minority shareholder's shares or have the corporation do so. In this situation, the corporation would not dissolve and the shareholder filing the lawsuit would be forced to sell his shares. As another example, consider the situation in Pennsylvania when the lawsuit for involuntary dissolution is based solely on the shareholders' disagreement over whether to dissolve the corporation. If the disagreement is between two 50-percent owners or is between a minority owner who wants to dissolve the corporation and a majority holder who does not, the court will not dissolve the corporation unless one of the following additional factors are proved: the directors’ actions are illegal, oppressive or fraudulent; the corporation’s assets are being wasted; or the directors are so deadlocked that the corporation will be irreparably harmed. This additional proof requirement makes it more difficult to obtain an involuntary dissolution of the corporation.

Buy-out Agreement

If the facts of your situation and applicable law make neither a voluntary or involuntary dissolution viable, your only option may be to negotiate a buy-out of your shares with your business partner. Although the corporation will continue to operate, you will be relieved of further liability or responsibility for its operation by selling your shares. In an ideal situation, you and your business partner would have already negotiated and signed a buy-sell agreement, also known as a shareholder agreement, before starting business. Such an agreement provides the parameters for a buy-out of one business partner by the other when certain situations occur, such as a deadlock regarding whether to continue in business.

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Dissolving a Delaware Corporation Without Shareholder Approval

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Steps for Dissolving a Corporation

Properly dissolving a corporation requires filing certain paperwork with the IRS and with the state in which your corporation is incorporated. It is important to take all of the required steps, and file all of the required paperwork, because failure to do so could result in the owners or directors of the corporation becoming personally responsible for any lingering debts or liabilities of the corporation. For specifics regarding the exact paperwork and forms that you need to file in your state of incorporation, you may need to to check with the appropriate agency of that particular state government or enlist the assistance of an attorney licensed to practice law in that state.

Can an Owner Be Voted Out of an S Corporation?

S corporations are corporations that have made a special election with the Internal Revenue Service to be taxed only at the individual shareholder level rather than at both the corporate and individual levels. Owners of the company, known as shareholders, do not participate directly in business operations and may not be voted out. If a shareholder takes on an additional function as a director or officer, he may be removed from that position. However, this removal does not affect the shareholder's ownership in the company.

How Can a Person That Owns a Corporation Get Sued for Fraud?

One of the biggest advantages of a corporation is that this business structure protects controlling shareholders from personal liability for the debts and liabilities of the business. This protection does not mean that persons involved with the corporation can undertake fraudulent activities and enjoy immunity under corporate liability protection. Officers, directors and controlling shareholders of the corporation owe the other shareholders a fiduciary duty. Under the legal theory of “piercing the veil,” a controlling shareholder can be held personally responsible for fraudulent actions by the corporation initiated by that individual.

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