Dissolution, the process of officially closing down a business, can be a complex process given the assets and liabilities of a corporation. Once a governing body of an organization decides on a dissolution, having a plan for dissolution from start to finish can save on time and costs. That being the case, this blog is intended to be an overview of the corporate dissolution process.
Internal Adoption
First, the corporation must formally decide it wants to dissolve. While the seems obvious, it is a decision that requires precise steps to do right. Dissolution must be approved and adopted internally by governing body of the organization, typically the board of directors, in accordance with state law and the corporation’s Articles of Incorporation and Bylaws. Special attention should be paid to notice and voting provisions.
After the board decides to dissolve, it must advance its decision to the corporation’s shareholders for an affirmative vote. In Washington state, shareholders are entitled to vote on the adoption of corporate dissolution If the corporation is a nonprofit that has members, the decision to dissolve is forwarded to the members for voting. In either case, the dissolution cannot take place without the approval of the corporation’s shareholders, or members in the case of a nonprofit.
If the corporation is a nonprofit that has members, the decision to dissolve is forwarded to the members for voting. Members of nonprofits have a statutory right to vote on material decisions like dissolution, so dissolution cannot take place without the approval of the corporation’s members.
Whether a for-profit corporation or a nonprofit corporation, the mechanical steps approaching dissolution are nearly identical.
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- The board of directors must adopt a proposed dissolution for the corporation. After adoption by the board, the proposed dissolution must be submitted to the shareholders/members entitled to vote. The board shall deliver to all members a recommendation that the members approve an amendment, and must comply with notice provisions.
- After the board refers to proposed dissolution to the shareholders/members, the voting shareholders/members then approve dissolution and its process. This approval occurs at a meeting of the shareholders/members conducted in accordance with the voting requirements of the Bylaws or the organization.
In the case of nonprofits, it is important to note that the Articles of Incorporation or Bylaws of a nonprofit may limit the members right to vote on some matters but not others, set certain voting thresholds, or prohibit voting by proxy. The organization’s governing documents should always be consulted to determine the voting rights of the members.
For nonprofit organizations without members, the process is much simpler. The board of Directors will review, approve, and adopt the dissolution documents. The board of directors may adopt such dissolution by the vote of a majority of the directors in office.
- Nonprofits Must Notify the Attorney General
Nonprofit corporations have special rules around dissolution. Nonprofits are considered to be organizations run for the benefit of the public and, this being the case, state law requires a nonprofit notify and prove it is dissolving in way that protects the public interest.
After internally approving dissolution, you need to prepare and, ultimately, adopt a Plan of Dissolution. A Plan of Dissolution sets out where and how a nonprofit is going to distribute its assets upon dissolution.
Timing is important here, at least 20 days before enacting the plan, you must send a notice to the Attorney General (AG) by registered or certified mail.[1] The AG, in turn, must approve your plan before it can be acted upon by your organization. If the AG doesn’t file an objection within 20 days after you’ve mailed the notice, it’s assumed that the AG has given its approval. The process for adopting the plan of distribution is the same as for the resolution to dissolve: If you have voting members, the board adopts a resolution recommending the plan and submits it to the members for a vote; if you don’t have voting members, the board alone must vote to approve the plan.
Make sure to properly record the resolution to dissolve, the plan of distribution, the directors’ votes, and, where necessary, the members’ votes. You’ll need this information for filings with the state and the IRS.
Winding Up
After your nonprofit has formally authorized dissolution, it continues to exist only for the purpose of taking care of final matters. This period is known as the “winding up” of the company. Winding up is largely about paying off any debts and then properly distributing any remaining assets.
- Notice to Creditors; Debts
After adopting the resolution to dissolve, corporations both for-profit and nonprofit should “immediately” mail notice of the proposed dissolution to each of the corporation’s known creditors, and to the Department of Revenue (DOR) (see Tax Clearance below). Following this, all debts should be negotiated and paid.
- Distribution of Assets
Generally speaking, you can only distribute money and property after you’ve paid off all debts. After paying off obligations, remaining assets are distributed either to shareholders, if you are a for-profit corporation, or to another nonprofit, if you are a nonprofit corporation.
For nonprofit asset distribution, there is one additional consideration. A dissolving 501(c)(3) organization must distribute its remaining assets for the benefit of other tax-exempt purposes, i.e. to other tax-exempt organizations. This can be, and is typically, to other organizations that carry out similar activities to the dissolving organization.
Final Filings
After the internal approval process, the entity is ready to file with the state and officially close out the entity.
- Obtain a Revenue Clearance Certificate Application
This form’s purpose is for the DOR to make sure that you’ve paid all your taxes before you close your entity. If you find you have any outstanding taxes due, you’ll need to pay those taxes before the DOR will issue this clearance certificate. Once the clearance certificate is obtained, it will be submitted along with the Articles of Dissolution (discussed below).
The Certificate can be found on the DOR’s website: Revenue clearance certificate | Washington Department of Revenue
- Fill out Articles of Dissolution
The Articles of Dissolution will be the final step to dissolving your entity. Some basic information about your entity is required like name, address, etc. You can download the Articles of Dissolution for domestic Washington corporations (or a Certificate of Withdrawal for foreign corporations) from the Secretary of State’s website. Don’t forget to attach the Revenue Clearance Certificate.
Once submitted to the SOS, it will take about a month before it is processed and posted to the SOS’s database. If you fax file or request expedited service, processing is completed in about a week. Once processed, we recommend keeping the final document in your records.
A corporation should make sure to close all business bank accounts and credit lines and cancel any permits or licenses or anything else held in the corporation’s name. Though not legally required, corporation’s will also want to notify customers and vendors about your company’s dissolution. If the corporation is registered or qualified to do business in another state, you must file the necessary forms to terminate those registrations (called withdrawing from doing business). Otherwise the corporation will continue to be liable for annual fees and minimum business taxes in those states.
Conclusion
Dissolution, like bankruptcy or receivership, is one of the many tools corporations have to end a business in a manner that protects owners and operators form liability. To avoid the imposition of liability on individuals a part of the corporation, care should be taken to abide by state law and internal corporate governance.
This blog is for educational purposes only and does not constitute legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. Speak to a licensed attorney if you need help or advice in how to dissolve your organization. If you have any questions or would like to learn more, please contact Coleman Scroggins at Coleman@apexlg.com or visit our website and blog.