Dissolution of corporation is a formal end to a company, following the sale of assets for repayment of liabilities. It is often referred to as the last stage of liquidation, which is a process specified under Chapter 7 of the United States Code (USC). Corporation Dissolution is the concluding process after a corporation files for bankruptcy under Chapters 7, 11 and 13 of the federal court.
It necessarily involves settlement of creditors’ claims against the company through discharge of liability. Under Chapter 7 dissolution, this is carried out through sale of assets. In Chapter 11, other court and creditor approved means are used to discharge liability and free the business of all debt.
However, dissolution is a process in itself and requires several procedures which need to be undertaken for a legal dissolution after bankruptcy. All the internal stakeholders (board members) need to approve this decision. It is then followed by filing articles and forms with the government agencies. This documentation must be executed at both state and federal levels.
Even though the steps for dissolution are similar in most situations, there might be some exception owing to specific circumstances or difference in state laws. It is, therefore, advisable to hire a seasoned business attorney who will guide you through the intricacies of the process.
Steps Leading To Corporate Dissolution
- First and foremost, business operations must be ended and a formal written approval for dissolution from all the members of the corporation must be collected.
- This is followed by verification of fees and state taxes by the corporation to appropriate agency. This requirement varies from state to state. The common verification documents are 1099 payments, asset exchange or sales, final tax deposits, etc.
- An IRS Form 996 must be filed. This declares dissolution of the company. It must be filed within 30 days after declaration of a dissolution plan by the company.
- All the necessary Articles Of Dissolution must be filed with the state agency. The filing should be done in all the states wherein the corporation is registered. Information on any pending court actions, reasons for dissolution as well as bankruptcy information must be included in the Articles.
- This must be followed by carrying out a thorough inventory of remaining assets of the corporation, if they are not covered under the bankruptcy court’s jurisdiction. These assets most commonly include intellectual property (copyrights & patents), equipment, land, vehicles, and others.
- Group owned corporations form an operating agreement between managers, members, partners and any other internal stakeholders before commencing business activity. This agreement must be verified at the time of dissolution. This is important as the document elucidates the detailed division of assets during dissolution of a company. This verification is subject to availability of assets at the time of dissolution.
- After settlement of the claims made by creditors, the remaining assets (if any) must be distributed among the members as specified in the operating agreement.
Corporate dissolution is a complex process
The fundamental idea behind this procedure is to discharge liability and redistribute remaining assets among owners.