Sometimes for personal or financial reasons a business needs to end.
But, just like starting a business requires more than just completing a form, dissolving a business can be a complicated process.
If there was an operating agreement in place between the partners before getting started that dealt with issues of company dissolution that will make the process easier.
However, many businesses don’t have any documents that deal with the possibility of the company breaking up.
How Breaking Up a Company Can Be Like a Divorce
Just like when a marriage ends in divorce, there is often a lot of emotion involved in the ending of a business.
A lawyer can represent the business in the dissolution process. But, a lawyer cannot represent both the business and individual shareholders when there is a conflict between the business and the shareholders. Just like spouses in a divorce each have their own lawyers, if there are issues with the dissolution each shareholder should seek independent legal advice to protect their interests.
Under Maryland law, before a company can officially be dissolved, the shareholders must vote.
There are two ways this can happen. The majority of the board of directors can vote to advise shareholders that the company should be dissolved. A shareholder meeting must then be scheduled with at least 10 days advanced notice and two-thirds of the shareholders must vote to dissolve the company.
The other option allows for advanced written consent from the shareholders to dissolve the company. If all shareholders sign the consent the company can be dissolved once the consent is properly recorded. If not all shareholders sign the consent; the corporation may still be able to be dissolved without a formal meeting depending on how many shareholders did sign the consent. If less than two-thirds consent to the dissolution, the company cannot be dissolved.
Who Gets the Assets and Who Gets the Debts?
Once the dissolution vote is over, the winding-up process can begin.
The first step will be to mail notice to all the creditors about the dissolution. Creditors must be given at least 20 days notice of the dissolution prior to the filing of the official dissolution paperwork. Articles of Dissolution must be filed with the Maryland State Department of Assessments and Taxation (SDAT) once the creditors have been given proper notice.
It takes 7-8 weeks for the Articles of Dissolution to be processed unless the paperwork is expedited for an extra fee. The corporation may also be required to file a personal property tax report with SDAT.
Only after the creditors have been given notice and all of the paperwork has been filed with SDAT can the assets be dealt with. The assets can be sold at either a public or a private sale. Any money from that sale must first be applied towards any debts before being distributed to shareholders.
If all the debts are satisfied, than any remaining money should be divided up among the shareholders in proportion to their number of shares.
Often, this is the stage where a corporate dissolutions run into problems. Some shareholders may wish to buy certain assets such as intellectual property or customer lists. If an insider is buying these assets they must pay a fair market price or all the shareholders and directors may be open to lawsuits from creditors or other shareholders.
Another issue that often arises in closely held companies is where two or three people had an oral or written agreement about how to split up any assets that is different than the number of shares they have in the company.
Also, in many small businesses one or more of the major shareholders may have signed personal guarantees on business debts. If the company is dissolved and the debts are not paid off, the creditors can go after the individuals who signed the personal guarantees.
This winding-up stage is also the time to complete any remaining contracts and to initiate any litigation in the name of the company.
How to Deal With Shareholders
One way people get into trouble with the dissolution of a business is to fail to give all the required notices to shareholders. Often the shareholders are a small group of people, most of whom are involved in the day-to-day running of the company. This can cause people to get casual with things like meetings and written notice.
Failure to give the required legal notice or conduct formal shareholder meetings can void a corporate dissolution or even open up individuals to being sued, or even worse potential criminal charges for securities fraud.
Before taking formal action to dissolve a company, it is essential that you get expert legal advice about the process.
When there is a contingent of shareholders that do not wish the company to be dissolved they may try and stop the dissolution through legal action. But, so long as the group is one-third or less of the shareholders and all the proper procedures are followed, they will not be able to stop the dissolution.
Why You Shouldn’t Just Let the Business Expire
When a business has a very small number of shareholders, usually three or fewer, there is a temptation to avoid all of the paperwork and simply let the LLC or company charter expire. However, this is a dangerous plan.
If the company has creditors and they find out that the business has stopped operating but has not formally dissolved, they may have claims for fraud that can puncture the corporate veil and allow them to target the individual shareholders.
Another issue is it only takes one person to continue to take action in the name of the company. If someone changes their minds about the dissolution, they may start making new contracts or contracting new debts in the name of the company. If they have authority under the charter to take those actions and the company is not dissolved, those actions may end up being binding on the other shareholders.
When the business has come to an end the best protection for all the shareholders is to file formal dissolution paperwork and, under the guidance of an attorney, carefully complete all the notice requirements and winding down activities.