What happens if a company is dissolved? A company legally ceases to exist as a business entity after its dissolution.3 min read updated on February 01, 2023
Updated November 3, 2020:
Dissolving a Company
Dissolving a company refers to winding up the business formally. In addition to ceasing business operations, the dissolution process involves various other formalities. Usually, you need to file articles of dissolution or a similar document with the secretary of state. Dissolution terminates the existence of a company, but you must still:
- Wind up the operations
- Liquidate the assets
- Take other steps to end its existence
The impact of dissolution on the shareholders of the company depends upon its financial position. The shareholders may:
- Get their original investment back
- Receive nothing
- Have to pay money if the company becomes insolvent
The first step to begin the process of dissolution is to hold a board meeting and pass a resolution to dissolve the company. Once the shareholders approve the board decisions, you can file articles of dissolution. You must file this document in the same state where your company was incorporated. You may also have to file some other forms, depending upon your state's requirements.
Types of Dissolution
Dissolution can either be voluntary or involuntary.
Voluntary Dissolution:
A voluntary dissolution usually involves the following essential steps:
- Filing articles of dissolution or a similar document with the state.
- Ceasing business operations.
- Liquidating the remaining assets of the company.
- Repaying all outstanding debts, claims, and taxes.
- Distributing any surplus funds among the shareholders.
Involuntary Dissolution:
When any of the company shareholders files a lawsuit requesting its dissolution, the court may issue an order to dissolve the company. This usually happens when the relationship between the shareholders is such that it prevents the company's operation.
In some states like Arizona, a company is dissolved by a state agency if it fails to meet the state filing requirements. Such dissolution is usually known as administrative dissolution. It often means the company ceases to exist without the knowledge of its shareholders. It may result in substantial adverse consequences. For example, the shareholders may become personally liable for liabilities incurred because of continued operations after the dissolution.
Liquidation of Assets
After a company is dissolved, it must liquidate its assets. Liquidation refers to the process of sale or auction of the company's non-cash assets. Note that only those assets your company owns can be liquidated. Thus, you can't liquidate assets that are used as collateral for loans. Assets used as security for loans must be given to the bank or creditor that extended the loan, or you must pay off the loan before selling such assets.
The final step of dissolution involves distributing the company's remaining assets among the owners (a.k.a. shareholders). The assets may include the money kept in bank accounts or obtained from disposing of the company's non-cash assets. The payment to company shareholders is done on a pro-rata basis, i.e., in the ratio of their ownership percentages.
If a company is doing well, it may have leftover cash and assets after repaying its taxes and liabilities. In such cases, the leftover amount is totaled and divided between shareholders on the basis of their ownership stake. In exchange for getting back their investment (in full or part), the shareholders return their shares to the company, which are then canceled.
If a company returns any money to its shareholders while still having a debt outstanding, the creditor can sue, and the shareholders may have to return the received amounts. If there are any unpaid taxes, shareholders can be held personally liable to repay those taxes.
If the amount distributed to any shareholder is $600 or more, you must also issue Form 1099-DIV. This IRS form reports the amount of investment the company returned. The distribution amount the shareholder receives is not taxable if it does not exceed the original investment.
If any shareholder receives a distribution amount of less than his or her original investment, he or she can claim a capital loss in his or her annual tax return. If the distribution amount received is more than his or her original investment, the excess amount will be treated as short- or long-term capital gain, depending upon the period of investment. Investment held for a period of one year or less will be subject to short-term capital gains tax, whereas that held for more than a year will be subject to long-term capital gains tax.
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FAQs
After a company is dissolved, it must liquidate its assets. Liquidation refers to the process of sale or auction of the company's non-cash assets. Note that only those assets your company owns can be liquidated. Thus, you can't liquidate assets that are used as collateral for loans.
Can a business still operate if its dissolved? ›
Once a company has been dissolved, whether that was on a voluntary or involuntary basis, the business is considered no longer active. However, filing for a reinstatement helps restore the company back to active status with the state.
What happens if my corporation is dissolved? ›
After dissolution, your corporation continues to exist for the purpose of winding up its business. "Winding up" generally means resolving all outstanding claims and lawsuits against the company, distributing any remaining assets to shareholders, and closing any open accounts, licenses, permits, or registrations.
What happens to a company when it is dissolved? ›
Once a company is dissolved, it no longer exists as a legal entity and cannot conduct business or enter into contracts. Dissolution may also trigger a number of certain legal obligations, such as the distribution of remaining assets to creditors or shareholders. It also might involve the filing of final tax returns.
Can a dissolved company be held liable? ›
The corporation may remain liable to the extent of its undistributed assets or available insurance. The power of a dissolved company to defend and prosecute claims continues as necessary to wind up its affairs.
What if corporation is dissolved but keeps operating? ›
If your corporation has ceased its operations but continues to exist as a legal entity, it can incur legal liability and leave open the door for creditors to make a claim against the corporation. A formal dissolution of your corporation puts the world on notice that you are winding up your business.
Can I restart a company that has been dissolved? ›
Any corporation, limited liability company, limited partnership or limited liability limited partnership whose status was administratively dissolved or revoked can submit an electronic reinstatement application. Review the instructions for filing a reinstatement.
Can a dissolved corporation be audited? ›
The IRS typically does not go back more than six years for audits of dissolved businesses. If the IRS suspects fraud, or you did not file a return on behalf of your business, then the IRS can go back beyond six years for audit purposes.
Can a dissolved corporation defend itself? ›
Former officers, directors and shareholders of a dissolved corporation retain the protections against personal liability for the corporation. The dissolved corporation can answer a complaint in its own right, and the defense attorneys are free to appear on behalf of the dissolved corporation.
What happens to directors when a company is dissolved? ›
When a company is dissolved, its directors are released from their duties and responsibilities related to that specific company. As long as the individual has not been disqualified from acting as a director or found guilty of unfit conduct, they are free to take up directorship positions in other companies.
Your company's bank account will remain active for as long as it takes to wind up your company, and the funds in your account are available for any associated costs. You won't, however, be able to use your account for any new business.
How do you check if a company is dissolved? ›
Contact the local council office having jurisdiction over licensing at the location of the business and inquire about the license status. A non-renewal or cancellation of the license is a good indication that the business itself has folded.
What happens if a corporation dissolves and still owes tax debt? ›
Even if the corporation is involuntarily dissolved or dissolved by court order, however, it is still responsible for its taxes. The corporation will not owe future corporate taxes, even if the business it governs continues to exist. Instead, the business or individual owners of the business will owe these taxes.
Can a dissolved company sue? ›
A dissolved corporation does not lose its character as a corporate body after dissolution. Indeed, every state extends the life of a corporation after dissolution for a definite time so that the corporation can prosecute and defend lawsuits and otherwise settle its affairs.
What happens to liabilities when an LLC is dissolved? ›
Dissolution and Winding Up
Dissolving a limited liability company does not absolve the LLC of its debts. After the members of an LLC make the decision to dissolve it, the members must commence "winding up" its activities.
What is the liability of directors after dissolution? ›
It is important to recognize that dissolution does not mean absolution. Shareholders and directors are liable for wrongdoing even when the corporation no longer exists as a going concern. Additionally, shareholders and directors may pursue claims against individuals and entities who have harmed the corporation.
What happens when an LLC becomes inactive? ›
If a corporation or LLC is inactive by means of revocation or administrative dissolution, it cannot legally transact business in a state. This can impact the entire organization's ability to engage with clients, creditors, and other government agencies.
Can a dissolved corporation have a bank account? ›
Your company's bank account will remain active for as long as it takes to wind up your company, and the funds in your account are available for any associated costs. You won't, however, be able to use your account for any new business.
When should you dissolve your business? ›
If you're consistently losing money, unable to generate sufficient revenue, or facing insurmountable debt, it may be a sign that it's time to close. Evaluate whether there are viable solutions to turn the business around or if it's more financially feasible to close.
