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How to Dissolve a Corporation

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  • 0:08 Corporation
  • 1:34 Voluntary Dissolution
  • 3:22 Involuntary Dissolution
  • 4:35 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

Corporations generally have perpetual existence. Therefore, a corporation must be dissolved if the owners wish to terminate the corporation's existence. This lesson explains corporate dissolution.

Corporations

One of the oldest and most popular business structures is the corporation. A corporation is a complex business structure featuring a business entity that is completely separate from the individuals that run the business. The corporation is a separate entity from the corporation's shareholders, directors, officers, and employees.

Once formed, most corporations have perpetual existence. This means that the life of the corporation is not affected by the withdrawal or death of the owners. Because it's a separate entity, the corporation continues to exist even when the corporation's owners do not.

The life of the corporation can only be ended through dissolution. This is the process for legally terminating a corporation's existence. Dissolution ensures that the corporation is no longer liable for paying annual fees, filing annual reports, paying business taxes, incurring business debts, or incurring business liabilities. A proper dissolution minimizes risks and liability for the corporation's shareholders and directors.

Dissolution can occur voluntarily or involuntarily. Let's take a look at each type.

Voluntary Dissolution

Many corporations are terminated voluntarily. Voluntary dissolution will occur when the directors and shareholders approve dissolution through a resolution or the time period for corporate existence expires, as stated in the charter. There are several necessary steps to a voluntary dissolution. State laws vary, but generally a corporation must:

  • First pass a resolution by the board of directors that formally approves a termination of the corporation.
  • Then obtain the shareholders' approval of the directors' resolution by a majority according to the corporation's by-laws and the laws of that state.
  • Correctly notify the IRS that the corporation will be dissolved using the proper IRS forms.
  • Properly cancel all corporation licenses and permits issued in all states and in all cities and counties.
  • Individually notify all corporation creditors and debtors that the corporation will be dissolved so that they can make any final claims.
  • Take time to notify anyone else involved with the corporation, such as clients and employees.
  • Fully pay all debts and tax obligations related to the corporation and file a final tax return in order to wrap up the corporation's financial obligations.
  • Then liquidate and divide any remaining assets between shareholders according to the number of shares each owns.
  • Finally, file Articles of Dissolution with the state.

Involuntary Dissolution

Note that a corporation can also be terminated involuntarily. Involuntary dissolution most often occurs through judicial resolution, which means a court orders dissolution of the corporation. Involuntary resolution will occur when:

  • The state legislature acts to dissolve the corporation through newly enacted laws, such as making private oil corporations illegal.
  • The shareholders secure a judicial resolution if the directors are deadlocked on dissolution or if the directors are operating the corporation in an illegal or fraudulent manner.
  • The corporation's creditors secure a judicial resolution due to nonpayment of debts.
  • The state secures a judicial resolution for failure to uphold state corporate laws, such as failing to pay annual franchise taxes.

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