Dissolution of Incorporation

by Tom Streissguth
Before closing their doors, corporations must follow state law on dissolutions.

Before closing their doors, corporations must follow state law on dissolutions.

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In some cases, dissolving a corporation is more complicated than setting one up. A corporation that is winding down operations must follow state law on business dissolution. This usually involves filing the proper articles with a business regulator, often the secretary of state or division of corporations. There are requirements on final reports, tax returns, distribution of assets and the redemption of shares.

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Articles of Dissolution

The process of closing a corporation includes filing of articles of dissolution with a state agency according to state laws. For example, in Georgia, a non-public corporation must provide its full legal name, date of incorporation, and statements that there are no public shares outstanding and that all debts have been paid. In addition, a dissolving corporation must certify that the action has been approved by a majority of directors or private shareholders. Georgia law also requires that a dissolving corporation have a current, active business registration with the state.

Tax Matters

The Internal Revenue Service also enforces certain rules on dissolving corporations. When closing your doors, you must file a final federal income and employment tax return, and pay all taxes due. You must disclose how you disposed of business property, make a final report on any employee benefit or pension programs, report capital gains or losses, and file Form 966, Corporate Dissolution or Liquidation. Your state will also require the filing of a final annual business tax return; many states, including California, do not allow dissolution of a corporation that has suspended operations due to past-due taxes.

Debts and Directors

Dissolving a corporation does not cancel its debts. You must notify all creditors, debtors, vendors, clients, independent contractors, partners and employees that the corporation intends to dissolve. State law may also require public disclosure in advance of the dissolution. If officers continue to carry on business after the legal dissolution, they lose the protection of the state's corporation laws and can be held personally liable for any new commercial debts incurred as well as past-due taxes.

Shareholder Agreements

A public corporation that is shutting down must distribute any assets remaining to shareholders. This can only occur after legal debts (such as bank loans and company bonds) have been paid. A common practice is to liquidate assets and make a special dividend to shareholders, while filing a stock cancellation agreement signed by the shareholders and company officers. The agreement states the date and method that shareholders must turn over their certificates, and the payment (if any) of a cash distribution to the shareholders.