Making the decision to close a business can be a difficult one, and the steps that must be taken to do so are often complex. If a business owner determines the time has come to end operations, that business owner must go through the dissolution process. Whether dissolution is voluntary or involuntary, you may not take on new business or enter into new contracts during the period in which you are winding up your affairs. Doing so can result in a variety of legal issues — and potentially result in you being held personally liable for the debts and obligations incurred.
What is Dissolution?
Dissolution refers to the formal process of closing a business and winding down its affairs. In order to close an Limited Liability Company or corporation formed in New York, you must file Articles of Dissolution with the state. However, after the Articles of Dissolution are filed with the state, several legal requirements that must be met before a company can stop existing. All projects and contractual agreements must be wrapped up during the wind-down process and no new ones contracts can be taken on by the soon-to-be defunct entity.
During the wind-down process, all outstanding debts must be satisfied, and any company property must be disposed of by the soon-to-be defunct entity. Once all liabilities have been discharged and distributions have been made, the final business tax return should be filed as soon as possible. The remaining business assets are distributed to the owners.
What Happens if a Company Does Not Properly Dissolve?
A dissolution can go wrong in several ways — this can result in several unintended consequences, including personal liability. For example, if you fail to take the measures to properly dissolve your business, the company may still exist as an entity and continue to be subject to filing and tax requirements. Dissolution can also go awry if an LLC owner or corporate shareholder continued to enter into contractual agreements during the wind-down process. This continued business actions can lead to personal liability for any new debts and liabilities incurred.
There are a variety of ways in which a company might not dissolve properly, including:
- Failure to file Articles of Dissolution with the Secretary of State
- Failure to notify creditors of the company’s intention to dissolve
- Failure to follow the operating agreement during the wind-down process
- Taking on new business or contracts during the wind-down process
- Paying off the wrong creditor claims
- Distributing money or property to investors before creditors’ claims were paid off
Another issue that can sometimes arise is involuntary dissolution of an entity. For example, a corporation’s failure to file franchise tax returns for two years can result in the New York Secretary of State dissolving the company by proclamation. While LLC owners and corporate shareholders are typically shielded from personal liability during the existence of the company, they would no longer have these protections if the company is dissolved by proclamation. In such cases, a corporation can file for reinstatement.
Contact an Experienced New York Business Law Attorney
If you’re considering closing your business, you might be wondering “what is dissolution” and be unsure of the steps you need to take to avoid unintended financial and legal consequences. It’s essential to have a skillful business law attorney by your side who can help you through the dissolution process and ensure wind-down procedures are carried out properly. Brinen & Associates is committed to providing reliable representation to entrepreneurs and corporate owners for various business matters, including those involving dissolution. Call (212) 330-8151 or send us a message to learn more about how we can help.