What Happens to a Shareholder in a Dissolved Corporation?

By Belle Wong

What Happens to a Shareholder in a Dissolved Corporation?

By Belle Wong

Being a shareholder has many benefits, but when it comes to dissolving a corporation, it's important to know that the dissolution may have a financial impact on shareholders. Much depends on how the corporation is dissolved, as well as how involved a shareholder is in the management and operation of the corporation.

How a Corporation Is Dissolved

A corporation may be dissolved in one of three primary ways:

  • Voluntary dissolution. As the name suggests, a voluntary dissolution is one in which the shareholders of a corporation decide to dissolve or wind down the corporation voluntarily.
  • Involuntary dissolution. In an involuntary dissolution, the dissolution of the corporation is ordered by the court, such as when there is a disagreement among shareholders that prompts one or more shareholders to bring a suit to dissolve the corporation.
  • Administrative dissolution. This happens when a corporation neglects to properly file required documents (usually an annual return) in accordance with governing state laws.

Voluntary Dissolution

When the decision is made to dissolve a corporation voluntarily, all necessary steps must be taken to make the dissolution legally effective. Generally, the corporation needs to take the following steps:

  1. File all required dissolution documents required by state law.
  2. Wind down and discontinue all business operations, including payment of all outstanding debts and taxes.
  3. Liquidate any remaining assets, which can then be distributed to shareholders.

If assets are distributed to shareholders before all of the corporation's debts have been paid, creditors can sue shareholders for outstanding debt. However, generally, a shareholder will only be liable up to the amount that's been distributed to them. However, be aware that shareholders who function as officers or directors can be found personally liable for payroll- or tax-related amounts that remain outstanding.

It's also important to file the proper papers (typically articles of dissolution) with the state that governs the corporation. In some states, failure to file an annual return results in suspension rather than an administrative dissolution. This means that the corporation, while suspended, still exists, and all fees and penalties associated with any annual filing requirements will continue to accumulate. As a result, the corporation will be unable to dissolve until these accumulated fees and penalties, along with associated interest, have been paid.

Involuntary Dissolution

When a corporation undergoes an involuntary dissolution by way of a court order, shareholders can face some potentially negative financial consequences.

  1. Costs and legal fees associated with a lawsuit that results in a court-ordered dissolution are added to the corporation's outstanding debt, and, as with a voluntary dissolution, all outstanding debts must be paid before any remaining assets can be distributed to shareholders.
  2. If the court order mandates that any remaining corporate assets be liquidated via a court-ordered auction, it's probable that some or all assets will be sold for a price below (and sometimes substantially below) the assets' fair market value.

Administrative Dissolution

An administrative dissolution can occur if the corporation is governed by state laws that mandate dissolution if annual filing requirements are not met. The problem for many shareholders in such cases is that administrative dissolutions often occur without the corporation's knowledge.

Under those circumstances, it's likely the corporation will continue its business operations until it becomes aware it has been administratively dissolved. In such cases, shareholders can find themselves personally liable for any debts incurred during the period when the corporation continued to operate despite no longer having a legal existence.

Depending on how a corporation is dissolved, shareholders should be aware that they may incur negative financial consequences. Particularly with a voluntary dissolution, these consequences can be avoided by taking the proper steps to wind down the corporation's business operations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.