The dissolution of a corporation ends the unlimited life granted to the company and formally stops its business practices. The process is not an easy one regardless of the company's size. Dissolving a corporation also has far-reaching implications not only for creditors and investors of the business but also for its former employees who may have to look for new work.
Reasons for Dissolution
A corporation may choose to dissolve for multiple reasons, including a buyout from another company or to simply declare the formal end of its business operations. A corporation may be dissolved when it is bought out by another company because it is absorbed into that organization who then assumes all the debts and assets of the former corporation. A corporation may also be forced to dissolve due to bankruptcy liquidation or failure to file required annual reports with the federal or state government.
Corporate Dissolution Procedures
In order for a corporation to formally dissolve, its shareholders are required to agree by vote to commence the dissolution of the company. According to the FindLaw website, a two-thirds voting majority is usually required to commence the dissolution of a company. The corporation is then required to follow the dissolution process outlined in the company's articles of incorporation. A corporation is required to follow formal dissolution procedures in each state it is licensed to do business. Laws for corporate dissolution may vary by state.
Benefits of Corporate Dissolution
When a corporation dissolves, it is no longer required to pay business taxes and corporate maintenance fees charged by state governments and the federal government. The dissolved corporation is also free from the obligation to file annual financial reports at the state and federal levels. A dissolved corporation cannot continue to amass business debts. This allows the dissolved corporation to stop the financial ditch digging and begin the process of paying down its debts.
Corporate Dissolution Disadvantages
There are plenty of loose ends to tie off when a corporation elects to dissolve. Arrangements must be made to pay off creditors, make final tax payments to state governments and the IRS, file final tax withholding for employees and report the sales of the corporation's assets. The formal dissolution process can be complicated and can drag out for months if paperwork is filed in error. Creditors may also become increasingly aggressive if they have gone without proper payment and may elect to sue the dissolving corporation in an effort to secure a judgment against the company.