Closing a Chapter: Dissolution of Your Legal Entity.

Various reasons could lead to the business dissolution, such as bankruptcy, retirement, or change in career direction. When an entity is no longer doing business, it is very important to follows the legal steps in "winding itself up" as a legal entity.

Company Dissolution

Various reasons could lead to the dissolution of the business, such as bankruptcy, retirement, or change in career direction. When a business entity is no longer doing business, it is very important to follows the legal steps in "winding itself up" as a legal entity.

A Corporation or an LLC is an entity created under authority granted by the state. Hence, its existence may only be terminated by the state.

Business Law provides a procedure for dissolving Corporations/LLCs. All legal entities can only be dissolved through formal action, not by a letter or phone call. The company remains liable for all taxes, assessments, fines, penalties and interest until it receives a Certificate of Dissolution from the Secretary of State.

When closing a business there are several typical actions that need to be taken on Federal and State levels:

FEDERAL (IRS):

• You must file an annual return for the year you go out of business.


• You must make final federal tax deposits.


• Report capital gains or losses.


• Report partner's/shareholder's shares.


• If you have employees, you must file the final employment tax returns.


• File final quarterly or annual employment tax form.


• Issue final wage and withholding information to employees.


• Report information from W-2s issued.


• File final tip income and allocated tips information return.


• File final employee pension/benefit plan.


• Issue payment information to sub-contractors.


• Report information from 1099s issued.

STATE (where your entity is registered):

• You must file an annual return for the year you go out of business.


• Make final State tax deposits.


• If you collect Sales Tax in your State, file final Sales Tax Return.


• If you have employees, you must file the final employment tax returns with your State.


• File final quarterly or annual employment tax form.

Advantages of Proper Dissolution

There are two main reasons why you should close the company officially even though it's no longer doing business:

• axes and Fees:As long as the legal entity exists it is liable to pay taxes and other fees. If you want to avoid those unnecessary expenses it is highly recommended to close the business according to the rules defined by the state and get your Certificate of Dissolution. Until you get it, your company will be held liable to file all relevant federal, state, and municipal tax returns. Failure to file these returns will result in the heavy penalties and fees associated with the late filing.


• Personal Liability:Even if you have already stopped your business operations, legally your corporation/LLC, directors, and officers (in some cases also shareholders/members) will be still considered as personally liable for the company unless you file cancellation legally.

Proper Way to Dissolve a Company

1. First step is to hold a meeting of corporation's board of directors in which they need to propose a resolution for business closing ("Termination Proposal"). A vote must be taken and the minutes of the meeting must be recorded and retained in the corporate records. Then that proposed dissolution action must also be approved by majority shareholders.

2. Second step is filing Articles of Dissolution with the secretary of state. The procedure varies from state to state - in some states this is done with a simple certificate while others require a more complex process.

3. Once you get approval from to state to dissolve your corporation/LLC, then company assets need to be distributed to its shareholders/members.

The company must notify each director and shareholder, whether entitled to vote or not, of the proposed dissolution meeting. The notice must clearly state that the purpose of the meeting is to consider dissolving the entity.

The corporation/LLC will be withdrawn and its existence ended on the date the Certificate of Dissolution is filed and approved by the State. The Business Corporation Law does not permit the effective date of dissolution to be other than the date of filing of the Certificate of Dissolution by the State.

The Certificate of Dissolution must be signed by an officer, director, attorney-in-fact or a duly authorized person. The name and title of the signer must be typed or printed opposite the signature.

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