Dissolution is a process of winding down the affairs of a business and terminating its legal existence. The process is governed by the laws of the state where the business filed its original articles of incorporation (for a corporation), or articles of organization (for a Limited Liability Company).
For a corporation, the board of directors must pass a resolution to dissolve, which must then be approved by the shareholders. Thereafter, Articles of Dissolution must be filed with the Secretary of State.
For a limited liability company, the members consent in writing to the dissolution. Thereafter, Articles of Termination must be filed with the Secretary of State.
Once the Articles of Dissolution are filed by the Secretary of State, winding down is the only activity the corporation or limited liability company is authorized to engage in. Creditors must be given notice of the filing of the articles of dissolution, resulting in a shortening of the time when lawsuits may be brought against the business.
Before dissolving, a business should review its contracts to see whether they can be terminated on short notice, or are for some specified period of time. Dissolving in such a fashion that the business breaches existing contracts can lead to expensive and time-consuming litigation.
The IRS considers the distribution of assets to the owners of a dissolving business to be an income taxable event. Consequently, tax-deductible expenditures, such as contributions to employees' retirement plans, should be considered before final distribution of assets.
