Corporate Dissolution: An Alternative To Business Bankruptcy

Corporate Dissolution: An Alternative To Business Bankruptcy

For some businesses there comes a point where those in charge decide it’s time to wind down operations. Each year tens of thousands of financially troubled businesses filed for bankruptcy. But corporations often have a variety of alternative legal options, including a corporate dissolution. Voluntary dissolution offers some of the same advantages to business owners as filing for bankruptcy, but is often simpler, less expensive, and can potentially allow for greater privacy and control.

An Alternative To Bankruptcy

Generally, financially distressed companies and creditors look to maximize the value for the eventual distribution to creditors. While a Chapter 7 or Chapter 11 bankruptcy might be appropriate, a voluntary dissolution can, depending on the circumstances, be better suited to achieve this goal.

Dissolutions are typically faster than bankruptcy and involve lower transaction costs. The process also affords the business more control over the liquidation, claims resolution and asset distribution as compared to bankruptcy, which involves trustee oversight. In addition, dissolution requires shareholder approval, which can make it a better fit for private companies.  Another advantage is dissolutions offer more privacy, as bankruptcies require extensive information disclosures.

Companies often choose to dissolve at a point when they anticipate being able to pay creditors in full and return some funds to shareholders. When done right, a dissolution can prevent late claims against the corporation and protect directors from personal liability.  Of course, if creditors cannot be paid in full or don't agree to receive a lower amount, bankruptcy may be the only option.  

What Do I Need To Do?

The laws of the state of incorporation control the dissolution process. In Delaware, where many businesses are incorporated, the law allows for a voluntary dissolution through a stockholder vote. The process generally involves the following steps:

  • The board of directors approval of the dissolution and a liquidation plan;
  • If shares have been issued, a majority of the outstanding shares also needs to approve the dissolution in a written resolution;
  • Filing of a Delaware Franchise Tax Report and payment of any outstanding franchise taxes owed to the state;
  • Filing a Certificate of Dissolution with the State of Delaware. If the corporation has ceased transacting business and doesn’t have any remaining assets, it might qualify for the short form certificate of dissolution;
  • Within 30 days of the board of directors approving dissolution, file a notice of dissolution with the Internal Revenue Service (known as Form 966). If the dissolution involves the sale or exchange of corporate assets, Forms 8594 and 4797 might also be necessary;
  • Begin a formal claims process, giving creditors at least 60 days' notice of the dissolution and the deadline to file claims;
  • Review the filed claims, with offers to claimants or rejection of claims;
  • Resolve outstanding lawsuits, including any which might have been filed by claimants whose claims the company rejected;
  • Liquidation of all remaining corporate assets as laid out in the plan of liquidation;
  • File a final state and federal tax return for the corporation. The form should indicate that this is the final return for the corporation;
  • If the corporation is registered to do business in another state, it will have to withdraw or surrender those qualifications;
  • Make final distributions to creditors and, if able, to the applicable stockholders.

Once the dissolution process is underway, the corporation isn’t allowed to operate as a normal business. Corporations who start this process operate only to “gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets.” The corporation is allowed up to three years to complete the process. If additional time is required, a request has to be made to the Delaware Court of Chancery.  However, no such request is necessary with respect to any suits initiated by or against the corporation prior to or within that 3 year period, as the corporation continues with respect to that suit until resolved. 

Conclusion

Where all liabilities are known and can be handled either by payment in full or with agreement by creditors to accept a lesser amount that can actually be paid by a corporation, a voluntary dissolution can be the best route to wind down the corporation. If not, bankruptcy may be necessary. As with most corporate matters, any corporation considering dissolution should consult with a qualified attorney and tax professional to get advice customized to the corporation's particular situation and needs.

 

Shareholder Inspection Rights In California

Shareholder Inspection Rights In California

Drag-Along Provisions: What Startups Need To Know

Drag-Along Provisions: What Startups Need To Know