Voluntary Corporate Dissolutions: Common but Complicated
Voluntary dissolution of a corporation usually means something has gone wrong either between the owners or with the business concept itself, but the process of terminating a business does not have to be overly difficult. If the business owners had the foresight to plan an exit strategy during the formation stage, a dissolution can go very smoothly. Often, however, there is no exit strategy contemplated upon forming a business, and the owners then must face a daunting and disappointing to-do list in order to voluntarily wrap up the corporation. Although this article is specifically about the dissolution of a Pennsylvania business corporation, it does describe similar requirements to those for limited liability corporations (LLCs) and nonprofit corporations.
Corporations decide to terminate more frequently than most people would imagine, but there is a very specific process in Pennsylvania which needs to be observed to properly terminate a corporate entity. These steps can often be difficult to accomplish without help, especially if emotions are running high and not everyone is on the same page. Businesses should opt to compose an agreement between the owners to specify what is expected of each person during the dissolution. This can help to maintain harmony and accountability during the termination.
The first steps involve formalizing the decision to dissolve via a resolution proposed by the directors and adopted by the shareholders of the corporation. This resolution should contain a provision which specifies under which statutory section of the Pennsylvania Business Association Law the corporation is choosing to proceed. These sections basically require the choice between paying for any liabilities pre-dissolution or setting aside money to provide for any liabilities post-dissolution.
After a majority shareholder vote has been achieved, the next steps require that notice be published in a legal journal or newspaper of general circulation in the county in which the corporation exists. Notice must also be mailed to creditors, claimants, and the municipalities in which the corporation has places of business in Pennsylvania. The business must then begin to wind-up its affairs by collecting money it is owed and paying out money it owes. Leftover assets must be liquidated and together with leftover cash, be divided and distributed to shareholders according to their respective equity interests in the corporation.
Next the corporation must apply for tax clearance certificates from the Pennsylvania Department of Revenue and from the Pennsylvania Bureau of Employment Security of the Department of Labor and Industry. These certificates will evidence the payments of all necessary taxes to the Commonwealth. The corporation should also make sure its Abandoned and Unclaimed Property Reports for the Pennsylvania Treasury are current. After both of these certificates are received, they must be attached to the formal Articles of Dissolution and filed with the Pennsylvania Department of State. Once this form is filed, the corporation ceases to exist. In order to avoid future problems, the corporation should also indicate on its Pennsylvania Corporate Tax Return and Federal Income Tax Return for the last year of its existence that they are final returns.
Often the trouble is encountered when trying to get all of the owners, who may each feel differently about the dissolution, on the same page. This is where having a third party involved may help. An attorney may not only aid in navigating the necessary legal steps, but also may serve by drafting a dissolution agreement and moderating any disputes that come up along the way.