When Dissolving a Business Entity Makes Sense (and How to Do It)

Shutting down all or part of your business isn’t simply a matter of settling out accounts and satisfying consents and contracts. Just like every other aspect of your business, closing down a subsidiary or parent company and dissolving any business entity requires thoughtful consideration, diligence and a strict adherence to procedure. A single misstep can leave you and your partners personally liable for recurring Secretary of State fees, taxes, and even legal claims or pending judgments against the dissolved business entity.

If you’re reading this, chances are good that you (and your partners or shareholders, if any) have agreed that ceasing part or all of your operations is the best option. However, agreeing to cease operations isn’t the end of the conversation—it’s just the beginning. It may be more beneficial to consider a sale, a merger, or even liquidation. If ceasing operations is in fact the best option, consider the anticipated duration: is this shutdown temporary (for example, to re-allocate resources or retrofit a facility) or permanent? While temporarily halting business operations is ultimately a business decision that carries its own risks, appropriately tackling legal questions raised by the dissolution of a business entity can help limit or guard against personal liability for company debts.

First things first

Timing is important; even just a few days of extra expenses can turn a strategic exit into a crippling liability. As important is timing is, “[b]usiness owners can close their businesses, whether temporarily or permanently, at any time they choose, provided that they take the appropriate steps to ensure the protection of employees and corporate partners, if applicable, as well as service providers, customers and vendors with outstanding orders. If a shutdown is permanent, a business owner is obligated to fulfill her contractual obligations with regard to lease agreements, equipment rental, finances and other business services” ¹ (emphasis added).

Those “appropriate steps” can vary considerably depending on your circumstances, while protecting employees and partners, and fulfilling contractual obligations require a hard look at the state of the business. The larger the entity, the more considerations and requirements there are to fulfill during a shutdown. Depending on the circumstances of the shutdown and the size of your business, you may wish to consult with a public relations or corporate communications specialist; this option can help keep your company running effectively while some or all operations wind down.

Five steps to the dissolution of your business

Determining the state of your legal, contractual and governmental obligations is a horse of a different color; while paying for these services may be a bitter pill to swallow if your business is shuttering for financial reasons, the services of an accountant, a business valuation expert, and legal counsel are invaluable to maximizing your financial position and minimizing potential liabilities. These professionals can help you set a timetable for the steps required to close your business properly and help with everything from listing creditors to asset inventory to the tax consequences of dissolving a business entity. They can also help you navigate the five main steps of dissolution that apply to the vast majority of business entities, namely:

1. When your partners or shareholders agree to cease operations, it’s time to get to work. The first step is to formally vote to close the business (unless it’s a sole proprietorship, in which case there would be no entity to dissolve). Agreeing to dissolve the entity isn’t enough; your business must follow either the procedures set out in its organizational documents or the statutes of the state in which your company is incorporated. It’s crucial to follow the rules on this one; failure to adhere to the proper statutes could invalidate the dissolution and leave everyone involved open to future debt or legal action.
2. In most states, corporations and limited liability companies are responsible for regular business filings and/or taxes of some kind. Dissolving your business with the Secretary of State ends responsibility for these obligations, and thus prevents your closed business from incurring new debts. In Ohio, domestic for-profit corporations must obtain a Certificate of Tax Clearance before filing a Certificate of Dissolution with the Secretary of State. Ohio is not unique in this respect; paying off all government tax liabilities is a common prerequisite for dissolving a business.
3. Different types of businesses require different permits and licenses for operations. These documents don’t go into limbo just because the doors are closed; the business must cancel each document with the issuing authority. Additionally, an official “abandonment” must be published for any assumed or fictitious names related to the business. Failure to complete these items can result in liability for taxes or penalties incurred by others operating under your business name or license.
4. A corporation is a legal fiction, so even after all the dissolution filings are taken care of, the corporation technically continues to exist for purpose of winding up its operations. Now it’s time to begin notifying members of your commercial supply chain of your intent to cease operations. This can be the most delicate part of dissolving a business; navigating contractual notification obligations while fulfilling orders and winding operations down can be complicated. In addition, notifying creditors, suppliers or even employees at the wrong time or in the wrong order can bring operations to a grinding halt, destroying all of the planning, time and effort put towards winding up the business’s affairs.
5. When operations have ceased and all the paperwork has been filed, it’s time to finalize each detail on your master list. These items run the gamut from paying the final utility bill, to selling and assigning intellectual property, to archiving a copy of the website, to setting up a reserve bank account, to paying continuing liabilities. Business records and other data need to be compiled and placed with a custodian for a predetermined time period in the event of future audits and lawsuits.

Dissolving your business can help protect a parent corporation, partners, owners or shareholders from incurring liability, but only when proper procedure is followed and all conditions are satisfied. Facing dissolution, even when it stands to benefit your business, can dishearten even the toughest business owner. With The Gertsburg Law Firm on your side, you don’t have to navigate the complexities of dissolution alone. Our award-winning business attorneys have both in-house counsel and complex litigation backgrounds, giving your organization access to an experienced legal team with real life business experience in a wide variety of industries. To learn more about our flat-rate legal services, call 440-571-7777 or contact us to schedule an appointment at our offices in Cleveland or in Chagrin Falls.

¹Lisa McQuerrey, Can You Shut Down Your Company Anytime?, Chron.com (last accessed Jun. 7, 2017)