Next steps after you close your business
Updated: Jul 12
By Giselle Ayala Mateus
After a deep analysis of the situation, you have decided that it is in the best interest of all to close this business and move on. However, before you are finished and prepared to what's coming next, it is very important to be sure that you are in compliance. Nothing worse than discovering several months later that some steps or important notices were missed and now you need to spend money of fixing mistakes.
The decision of dissolving a business
Unless you are in sole-proprietorship, the decision of dissolving a business is made by more than one person. Knowing how to dissolve the business depends on the type of business you are involved with.
In the case of a partnership, it is the best practice to create a written documents that explain the conditions of the dissolution and how the partners are going to distribute any debts, assets or profits. Keep in mind that you don't need a formal agreement to be in a partnership because partnerships may exist as a result of the conduct of the partners, who decide to carry on a business as co-owner sharing expenses and profits. However, to limit your risk and potential liability, it is fundamental to have a formal document for the dissolution of the partnership.
LLC OR CORPORATION
In the case of LLCs or Corporations, it is important to distinguish three different escenarios:
Judicial dissolution takes place as result of a court order. A court can dissolve a business for failure to comply with state laws, failure to pay taxes, mismanagement, among others.
Administrative dissolution is imposed by the Secretary of State's office when the business entity fails to comply with state law, for example for not filing annual reports.
Voluntary dissolution occurs when the members or the shareholders decide by a vote to close their business.
If you need guidance on how to conduct your business or how deal with partners, the Law Office of Giselle Ayala Mateus can help you! FREE consultation.
1. Agreement to dissolve
Voluntary dissolution procedures depend on the the By-Laws or the Operating Agreement. These documents include dissolution triggers. Once an event described in those documents takes place, dissolution can be automatic, be subjected to a vote or be the result of an agreement. Once the a decision has been made it should be properly recorded in the official minutes.
In the case of corporations, unless otherwise agreed, shareholders hold a special meeting and vote. Before the meeting and the vote, the board of directors must adopt a proposal to dissolve the corporation. Said proposal is then submitted to the shareholders. The meeting and final vote are valid only if a proper notice is given to the shareholders. It is necessary to give at least a ten-day advance notice to each shareholder before the meeting to dissolve.
Dissolution typically must be approved by a majority of all shares entitled to vote on the matter, but depending on the effective date of the certificate of incorporation and of any amendments to that certificate, a two-thirds majority of all voting shares may be required to approve dissolution.
2. Making it official
LLC and corporations are created by filing a certificate of organization with the Secretary of States. Accordingly, proper dissolution requires an additional filing, in order to dissolve any of these legal entities, the Articles of Dissolution must be filed properly. The Articles of Dissolution contain important information such as, the name of the corporation or LLC, the date dissolution was authorized, and a statement that the dissolution was duly authorized by an act of the members, the board of directors or the shareholders.
In the case of a New York LLC, within 90 days of taking the necessary actions to dissolve, an authorized party must file the articles of dissolution with the New York Department of State ("DOS").
3. Special rules
Once a legal entity is dissolved, proper notice must be given to the department of taxation and to the IRS. Additionally, it is necessary to file a final business tax return, to do it properly it is fundamental to get the help of an accountant. There are specific rules or considerations that can be out of the scope of the legal advice of an attorney.
New York corporations must follow an additional step, it is necessary to obtain written consent from the Tax Department, which will check the corporation's status and see if the corporation owes back taxes and if it has filed all its returns. Moreover, if the corporation has done business in and incurred tax liability to the City of New York, it must request written consent to dissolve from the New York City Commissioner of Finance.
4. Winding up and giving proper notice to others
After the decision to dissolve is made and the articles of dissolution are properly filed, the LLC or Corporation will name a person responsible for "winding up" the company. This person is responsible for:
fulfilling or discharging entity's contracts
collecting the entity's assets
selling the entity's assets for cash at public or private sale
discharging or paying to the creditors; and
distributing remaining assets among the members or shareholders according to their respective rights.
Before distributing any assets the person responsible for the "winding up" process must give proper notice to the creditors of the entity. Otherwise, the members, board of directors or officers can be held personally liable for those pending debts.
To give proper notice to the creditors, the responsible party can by publishing a notice once a week for at least two consecutive weeks in a newspaper of general circulation in the county where the entity’s principal office is located at the time of dissolution. It is also a good practice to mail a written notice directly to each person believed to be a creditor or claimant. Generally, claimants have up to six months after the newspaper's publication was issued to bring a claim.
Before concluding this process it is good to make a final review of everything, close accounts, clear any pending matters, speak to clients, partners and creditors, and memorialize everything in writing. Finally, if the business operates in more than one state or internationally, it will be necessary to give proper notice to federal entities, as well as clients, partners and authorities in other jurisdictions, and file dissolution papers in each jurisdiction.
The dissolution of a business involves many small steps that require care and knowledge of the law. The Law Office of Giselle Ayala Mateus can help you to ease the process. Request your FREE consultation now!
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