What Happens When You Dissolve A Corporation?

When a corporation is dissolved, it no longer legally exists and, in most cases, its debts disappear as well. State laws usually give additional time beyond the dissolution for creditors to file suits for failure to pay any corporate debts or for the wrongful distribution of corporate assets. A corporation might need to be dissolved once it stops serving its intended purpose. It’s good to take a voluntary dissolution before too many legal and financial troubles build up and compound the problems of the corporation.

Reduce the stress of dissolving a corporation by getting a business advisor first, and then learn how to dissolve a corporation the right way. You will save your shareholders tons of money by properly dissolving the company, and you could potentially avoid any lawsuits by clearing up your corporate debt. Hire a business advisor today and make sure each step in the process is completed successfully.

Who Does It Affect?

This dissolution has an effect on clients, shareholders, and employees. Clients who are waiting to receive services or payments from the dissolved company will lose out. Any deposits that have already been paid are most likely gone and nothing that was listed in a contract is still valid beyond what was already rendered. There are some lucky cases where the client can hire some of the employees to try to maintain services, but these employees will not be able to share proprietary information from their previous employer. All of the information and work completed during their employment belongs solely to the dissolved company.

The effect of dissolution on shareholders will vary depending on how the company gets dissolved. A voluntary dissolution that splits assets and still has corporate debts on the books could make the shareholders liable for certain debts. An involuntary dissolution that happens by the state or the court can cause shareholders to owe additional liabilities and expenses. In addition to the court costs and legal fees for an involuntary dissolution, a court-ordered liquidation usually results in an auction of corporate assets which will earn less than market value for the items. In order to avoid all of this negative backlash, it’s important to dissolve the corporation properly by taking all of the necessary steps.

The steps for voluntary dissolution are:

  1. File documentation with the state
  2. Wind up business operations (which includes resolving all debts, claims, fees, and taxes owed to government)
  3. Liquidate and distribute all remaining corporate assets to shareholders

One of the good things about shareholder liability after dissolution is that the debt liability will only be limited to the number of corporate assets the shareholder received during distribution. Shareholders can still be personally liable for tax and payroll debts if they were involved in corporate operations.

How The Dissolution Affects Employees

A corporate dissolution causes the current employees to lose their jobs and have to find new ones. The majority of the time the laid-off employees can apply for unemployment in their respective states. Understanding the effect that a dissolution will have on employees is deeper than just closing the doors. Employees have invested lots of time and skill in the company, and most of the time they are not aware that the company plans on disappearing. Once the corporation closes, employees have to worry about unpaid wages and other benefits that have not been paid out. There will be several questions regarding the closure, and that’s why it’s best to hire a professional to handle the personnel side of things.

One great way to show employees that you care about their lives is by keeping good notes in their files. Along the way, you might notice which employees are really good at certain tasks. These are things to point out to the individuals as well as keeping a copy of their strengths in their employee record. The way this helps is if the business ever closes and the employees are stuck finding new jobs, you can give them a copy of their strengths and a solid recommendation letter that will help them move on to another job or field with confidence. Letting employees know their strengths is a real help when it comes to asking for raises or climbing the corporate ladder of any company.

 

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