Unfortunately, this information may come in handy for some people…
When winding down a business, the type of business will determine the necessary steps that need to be implemented in order to dissolve an existing entity. This article will focus on a few of the more common types of business entities.
According to the Model Business Corporation Act (MBCA), the directors must adopt what is known as a dissolution resolution, and the majority of shareholders, or the shares outstanding must be in favor of the proposed resolution. The corporation must file articles of dissolution with the secretary of state, a procedure that can vary from state to state. The dissolution becomes effective after the filing.
After the proper paperwork is filed, a corporation continues to exist, but may only operate for the purpose of winding up, which is the collection and distribution of the proceeds from the corporation’s assets. Any existing creditors will be paid first, followed by preferred shareholders (if any), and then common share holders. When this process is completed, the existence of the corporation is terminated. However, this may not release a person from liability if they are action on behalf of the dissolved corporation. There may be issues such as back taxes, or failure to file annual reports that this individual would have the responsibility of resolving.
The dissolution of a partnership can have many of the same aspects of a corporate dissolution, however, the details can be markedly different from articles of incorporation in that partners may have made business agreement that suit the specific partners. Although laws vary from state to state, generally the distribution of the liquidated assets would be as follows: creditors, followed by what is owed to partners for other than capital or profits, then to partners capital and profit. Again, laws vary from state to state, and the individual business entity may have a general agreement regarding winding up of a business. If a partnership does not have such an agreement, the liquidation of the partnership can, and most likely will encounter legal challenges and other hurdles that could have been avoided by a dissolution agreement.
The Limited Partnership
In a limited partnership, the limited partner has the rights of creditor upon dissolution, although their priority is behind that of the general creditor. For example, if the limited partner loaned money to the partnership in the capacity of an outside entity, not a partner, then upon winding up, the limited partner may have a claim to recover the loan. Again, laws vary from state to state. As in the partnership, a dissolution agreement can help avoid such a possibility.
Winding down this type of business is potentially the easiest of all business forms, mainly since it quite often has no formal structure. In this case, liquidating assets and dissolving a sole proprietorship does not release the sole proprietor from incurred liabilities related to the business. The sole proprietor is responsible for any debt or legal issues stemming from the business.
With all of the above scenarios, it almost goes without saying to retain an attorney. Depending on how complicated the winding down of a business is, an attorney may be able to save corporations and/or partners a significant amount of money and potential legal trouble. Even if there does not appear to be anything that would prevent the smooth liquidation of a business, an attorney can at least examine the process and spot any potential problems.