Your business might dissolve for a variety of reasons. The business might not have enough money coming in to cover costs, partners could have a falling out, or top executives could have mismanaged funds or clients. Regardless of the reason, it’s important to know how to dissolve a business and where any remaining money goes.
“Business dissolution” means legally and formally ending a business. You “dissolve” a business by voting to end the company and filing the dissolution paperwork. You “wind up” a business by wrapping up the company’s current business relationships and obligations and by distributing any remaining company assets. By the end of the process, the business will stop all operations, remaining debts will be paid, and paperwork will be filed with the state to officially close the business.
You can wind up a business by following a series of steps. These steps vary based on whether you have a:
We’ll take you through the general winding-up procedure for each of these business types below, but as you go through the process, make sure to check whether your state has any different or additional requirements.
How to Dissolve a Corporation
You can dissolve and wind up a corporation by following the steps below.
1. Vote for Dissolution
Your board of directors should draft a resolution to dissolve the corporation. The shareholders will then vote to approve the dissolution. The number of shareholders needed to pass the vote for dissolution will depend on the rules found in your:
- corporation’s articles of incorporation
- corporation’s bylaws, and
- state’s laws.
As an example of how state law can factor into the process, South Carolina and Texas require that a vote to dissolve be approved by two-thirds of the voting shareholders unless the articles of incorporation (or certificate of formation) says otherwise. (S.C. Code § 33-14-102 (2022); Tex. Bus. Org’t Code § 21.364 (2022).)
Many states also require corporations to hold a meeting for the vote and to notify shareholders in advance of the meeting. You’ll need to check the laws of your state to make sure your notice has all the required details. For example, in North Carolina, you must notify shareholders 10 days before the meeting to dissolve and the notice must include the date, time, place, and purpose for the meeting. (N.C. Gen. Stat. § 55-7-05 (2022)).
2. File the Articles of Dissolution
Once you’ve secured the vote, you’ll need to file “articles of dissolution” or a “certificate of dissolution,” depending on your state. You’ll submit this document to the same Secretary of State (SOS) office (or other corporations division) where you filed your articles of incorporation. You’ll also need to pay the required fee. Visit your SOS website to find the articles of dissolution form.
3. Pay Your Taxes
You’ll need to file the appropriate forms with the IRS and your state’s tax office and pay all taxes for the corporation.
File IRS Form 996, Corporate Dissolution or Liquidation within 30 days after the resolution is approved, along with your final tax return. The IRS has a list of forms to file based on your business type.
In some states, like New York and Texas, you’ll need to pay all taxes before you can file your articles of dissolution. Consult a tax attorney or CPA to make sure all of the appropriate forms are filed, and taxes paid.
4. Notify Creditors Your Business Is Closing
You’ll need to let your creditors know that your business is dissolving and that they should make any claims for any money you owe them now. Even if it’s not required by your state, you’ll want to send each creditor a letter through certified mail letting them know that you’re dissolving your business and that they should let you know of any outstanding balances you owe them. If a creditor ever comes after you, you can show you were thorough and well-intentioned because you took deliberate steps to identify any outstanding debts.
Your state’s laws will determine how much time your creditors have to make their claims, but it’s usually between 90 and 180 days after notice.
Your state might also allow a period for unknown creditors to come forth after public notice, meaning you might have to post a notice in a local newspaper about your company’s dissolution.
5. Sell Corporate Assets
It’s best to leave the business with as few assets and as much cash as possible. For instance, if you bought a car with company funds, then the car should be sold, and the proceeds placed in the corporate bank account.
You should sell off (or “liquidate”) any property, including:
- land and buildings—for example, your offices (if you own rather than rent them)
- vehicles
- office furniture
- equipment—for example, computers and printers, and
- excess raw materials.
To illustrate, a textile manufacturer might sell its factory building, trucks, forklifts, machinery, and leftover yarn and fabrics.
6. Pay Off Remaining Debts and Distribute Assets
After notifying creditors and dissolving company assets, you should be ready to pay off any remaining debts. Debts might include loans, payroll, leases, and any money owed on remaining contracts. If the corporation doesn’t have the funds to pay all existing debts, you may be able to settle for less with your creditors. (Shareholders generally aren’t not personally responsible for any corporate debts, except in a few circumstances.)
Once your debts are paid, you’ll know how much money is left to distribute.
You should then distribute any remaining to shareholders based on their ownership percentage. For example, if you have $10,000 remaining and two shareholders with 80% and 20% ownership, one shareholder will receive $8,000 and the other will receive $2,000.
7. Close All Accounts and Cancel Licenses and Permits
Your bank accounts should now be at zero, so it’s time to close them out. You’ll also need to cancel any licenses or permits associated with your industry.
8. Close Out All Remaining Business Activities
You should have nothing left in your business’s name. Double check to make sure all services, subscriptions, and policies are canceled.
However, instead of fully canceling any insurance policies, you might want to consider extended coverage options to protect you and your company against any issues that might come up once your business has dissolved.
How to Dissolve a Limited Liability Company
The steps to dissolving and winding up a corporation (which you can review above) are similar to those for closing down a limited liability company (LLC). Review your articles of organization, operating agreement, and state’s laws for specific guidance on the dissolution process.
1. Vote for Dissolution
Members of the LLC should vote on a resolution to dissolve. You can look at your founding documents or state laws to determine how many votes are needed to pass the resolution. Instead of holding a vote, you may also have the option to dissolve the LLC by obtaining written consent from all the members.
2. File the Certificate of Dissolution or Cancellation
You’ll need to file a certificate of dissolution or certificate of cancellation with the SOS’s office where you filed your articles of organization.
In some states, how your LLC was dissolved will determine which filings you have to submit. For instance, in California, if the vote to dissolve was unanimous, you only need to file a certificate of cancellation. If the vote wasn’t unanimous, you’ll need to file a certificate of dissolution in addition to a certificate of cancellation. (Cal. Corp. Code § 17707.08 (2022)).
3. Pay Your Taxes
You’ll need to file the appropriate forms and pay all taxes with the IRS and your state’s tax office. An LLC is a business type that’s only recognized at the state level and isn’t a recognized tax structure. As an LLC, you will be recognized and taxed by the IRS as a:
- c-corporation (or “c-corp”)
- s-corporation (or “s-corp”)
- partnership, or
- sole proprietorship.
If you haven’t elected to become a c-corp or s-corp by filing the appropriate form with the IRS, then your LLC will be treated like a partnership if it has more than one member and as a sole-proprietorship if it has only one member. Depending on your state, you might face an additional annual tax on your LLC.
You can find out what federal forms to file based on your business type on the IRS website. Talk with a tax attorney or CPA if you’re unsure about how your company should be taxed.
4. Notify Creditors Your Business Is Closing
You may be required by state law to notify creditors that your business is closing. Depending on your state’s laws, you might need to provide advance notice directly to each known creditor, or publishing a notice in a newspaper may be enough. (See the section above on dissolving a corporation for more info on how and when to provide notice).
Be aware of important details in the notice process:
- whether you need to provide notice before the LLC is dissolved
- whether you need to inform creditors directly through certified mail or indirectly through publication
- what information a notice should include, and
- how long creditors have to bring forward their claims.
For example, in Maryland, you must mail written notice to your creditors of your plan to dissolve your LLC at least 19 days before you file your articles of cancellation. (Md. Code Corps. & Ass’ns § 4A-910 (2022).)
5. Sell Company Assets
Do your best to sell any remaining assets your LLC owns. These assets include any real estate or personal property in your business’s name. (See the section above on dissolving a corporation for more info on selling assets.)
6. Pay Off Remaining Debts and Distribute Assets
Pay off any remaining debts or claims from creditors. (As with a corporation, members of an LLC aren’t on the hook for any company debts, with a few exceptions.) This is the time when you will send out final paychecks to any employees and settle any business loans.
States often have requirements for how remaining assets are distributed. Typically, the LLC has to distribute remaining assets in the following order:
- pay any creditors or outside debts
- repay any LLC members for their contributions—for example, if a member contributed $5,000 to start business operations, the company should reimburse that member if it hasn’t already, and
- distribute any money left over to the members based on their ownership percentages or their capital accounts, according to the operating agreement.
7. Close All Accounts and Cancel Licenses and Permits
Once your assets and liabilities have been resolved, you should close all bank accounts. You might also need to cancel business licenses and permits, if you have any. For example, a bar will need to cancel its liquor license.
8. Close Out All Business Activities
You should look over all final items to make sure your business isn’t still paying for any subscriptions or ongoing services. Ask your insurance provider for extended protection options for covering you after your business closes.
How to Dissolve a Partnership
To dissolve a partnership, you’ll need to follow the procedure outlined in your partnership agreement. But if you don’t have an agreement, you’ll have to review your state laws for the proper procedure. While states might differ in their approach, the procedure usually follows the general outline below.
1. Agree to Dissolve the Partnership
Again, if you have a partnership agreement that lays out guidance for dissolution, follow those instructions; otherwise, you’ll need to follow the rules set out by your state.
Most states have adopted part or all of the Uniform Partnership Act (UPA). The UPA allows for a dissolution when:
- a partner willingly leaves
- a partner is forced out
- a partner dies
- the business files for bankruptcy, or
- a court issues an order to close.
The UPA outlines a few other reasons for dissolution—for example, a merger or business restructure—so make sure you review your state laws to see whether you can dissolve your partnership. Your partnership agreement may also offer a few circumstances when dissolution is appropriate.
2. Draft an Asset Distribution Agreement
You should agree on how remaining assets will be divided and put it in writing. (If you can’t agree, then you can hire a mediator to help you resolve any disagreements.)
You can also take this time to assign each partner responsibilities for closing out the business. For example, you may decide to split the assets equally and put one partner in charge of closing out certain contracts while the other partner is responsible for selling the computers and printers.
3. If Necessary, File the Certificate of Cancellation or Withdrawal
Depending on what type of partnership you have, you might need to file the appropriate forms with your state in order to officially dissolve the business. There are three main types of partnerships, each with its own way of ending the business:
- General partnership (GP). In a GP, partners usually have equal ownership and equal control over and participation in the business. These partnerships are formed by a partnership agreement or by two parties behaving like partners. Because you usually don’t need an official filing to create this kind of partnership, there’s normally no filing required to dissolve this type of partnership.
- Limited partnership (LP). In an LP, one partner generally has more control over and participation in the business and manages the day-to-day activities. Meanwhile, the other partners take a backseat and act as investors. For example, one partner might manage a travel agency in Florida while the other two limited partners in California provide the funds to run the business. The form you need to file to dissolve an LP in many states is either a statement of dissolution or certificate of cancellation. For example, in North Carolina, you must file a certificate of cancellation.
- Limited liability partnership (LLP). In an LLP, partners usually co-manage the business and share equally in the profits. (But partners aren’t legally responsible for the actions and misdeeds of their fellow partners.) States sometimes only allow businesses providing professional services—for instance, doctors or lawyers—to form LLPs. In many states, you’ll need to withdraw or cancel you registration to dissolve your LLP.
4. Pay Your Taxes
You’ll need to file and pay taxes with the IRS and state. For federal taxes, file IRS Form 1065, U.S. Return of Partnership Income for the year you close your business. You can look at the IRS website to determine what forms to submit. For state taxes, you can consult your state’s franchise tax board or equivalent agency’s website to make sure you’re all caught up on payments and filings. Connect with a tax attorney or CPA to make sure all of the appropriate forms are filed, and taxes paid.
5. Notify Creditors Your Business Is Closing
You should notify any known and unknown creditors by mail or public notice that your partnership is dissolving. As good practice, you should send each known creditor a letter through certified mail stating your intention to dissolve your business.
You’ll want to include in the notice how and when they can notify you of any outstanding balances you owe—for example, an address where they can now send their claims. For unknown creditors, you can publish a notice in a local newspaper.
While not always required by law, providing notice is a good way to limit your liability from any claims that may come up down the line. For example, a creditor couldn’t reasonably claim that you intentionally tried to dodge your debts if you provided notice in the local paper. (See the section above on dissolving a corporation for more info on how and when to provide notice.)
6. Sell Partnership Assets
You should sell any property acquired under the partnership or bought with partnership funds. (See the section above on dissolving a corporation for more info on selling assets.)
7. Pay Off Remaining Debts and Distribute Assets
You should pay or settle all debts, liabilities, and loans. If the partnership cannot cover any of these debts, then the partners will be personally responsible for covering them.
If you have enough funds to pay your accounts, then you can simply pay off any remaining balances. But if you’re low on funds, you may be able to close any debts by negotiating a lower amount with the creditor or getting the creditor to waive the debt completely.
If there’s any money left over after paying debts, you can distribute funds based on your partnership agreement. If you don’t have an agreement, look to your state’s laws for guidance. (It’s common for remaining proceeds to be divided evenly or based on the partners’ contributions.)
8. Close All Accounts and Cancel Licenses and Permits
You’ll need to close any bank accounts associated with the partnership. Don’t forget to cancel any licenses or permits the partnership has.
9. Close Out All Business Activities
End any services or subscriptions currently under your partnership’s name. Check with your insurance provider for any extended protection options that can protect you as a partner from any issues that could come up down the line after you’ve ended your partnership.
How to Dissolve a Sole Proprietorship
Dissolving a sole proprietorship looks a little different from dissolution of a corporation or partnership, both of which you can read about above. But you’ll still need to complete many of the same steps. Once you’ve decided to end your business, you’ll need to:
- Finish up any remaining contracts or incomplete business deals.
- Notify customers and creditors of your plan to end your business. (See the section above on dissolving a corporation for more info on how and when to provide notice.)
- Sell off any remaining assets that you no longer need. (See the section above on dissolving a corporation for more info on selling assets.)
- Pay and settle any current debts and liabilities. You will be personally responsible for these debts. You can pay all debts in full if you have the funds or you can see if the creditor will accept a lower amount.
- File and pay your taxes with the IRS and state. File a Schedule C, Profit or Loss From Business and any other required documents with the IRS. Check your state’s tax agency website for more information on what forms to file.
- Cancel your fictitious business name (FBN) or doing business as (DBA) name. You’ve likely filed papers to register an FBN or DBA. If your state requires the FBN or DBA to be filed at the county level, as many do, make sure you cancel (or “abandon”) your DBA or FBN designation with every county that you filed with. Also, follow any requirements for publishing a notice in local papers.
- Close all bank accounts and cancel any licenses or permits. Make sure you’re following your state’s requirements for canceling licenses and permits.
- Close out any services or subscriptions you’ve used for your business. If you have insurance, you should determine whether getting an extended coverage plan makes sense for you.
Consulting a Business Attorney
Winding up a business may feel personal if not sentimental, but it involves many other parties and requires detailed steps. Remember that you can always meet with an attorney and CPA for help making sure that you properly close your business for good.