Dissolution of Incorporation

By Tom Streissguth

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.

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.

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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.

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The Dissolution of an S Corp


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What Does Dissolved Mean for a Corporation?

A corporation is an independent legal entity, separate from its owners, who are known as shareholders. It is this independence that affords the shareholders limited liability for the debts of the company and enables them to easily transfer their shares in the business. But when a corporation decides to cease operations, or dissolve, it must undergo a process to terminate its independent legal status. Corporations are regulated under state law, so the dissolution process can vary. However, there are some general steps that all corporations must take.

How to Close an S-Corporation in North Carolina

To close an S corporation, or S corp, there are a number of steps you must take to ensure that the corporation has settled its debts and will no longer be liable for taxes. Both the board of directors and the shareholders must agree to close the corporation. You should inform all business associates, creditors and consumers about the dissolution, and ensure that all business debts and wages are paid. Finally, you must notify the state and file final tax returns.

What Happens to a Shareholder in a Dissolved Corporation?

A dissolved corporation ceases to legally exist and the effect this has on its shareholders depends on how it was dissolved. If the corporation is dissolved voluntarily and its assets distributed to the shareholders without paying all remaining corporate debts, the shareholders could become liable for the debts. If the corporation is dissolved involuntary by the court or administratively by the state, the shareholders can incur additional expenses and liabilities. Avoiding these negative financial consequences requires proper dissolution of the corporation.

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