Three Types of Dissolution

3 Types of Dissolution

Dissolution of a corporation refers to the official closing of a corporate entity,  which can be a complex process. Below is a brief introduction of the types of dissolution with the state. There are 3 main ways a company can be dissolved – administratively, voluntarily, and judicially. I will not detail the judicial dissolution process because it does not seem applicable in your situation.

Administrative dissolution is where the Secretary of State (SOS) dissolves a corporation if it has failed to pay fees imposed by the SOS, failed to have a registered agent for 30 days, its period of duration has expired, or more commonly, the corporation has failed to file its annual report 120 days after its due date. Administrative dissolution is the cheapest, easiest, and most unintended route for dissolution. While administrative dissolution can be as easy as just waiting out the clock for the SOS to dissolve an entity, administrative dissolution does not provide the same benefits and legal protections as a voluntary dissolution, and can leave you exposed to liability.

Voluntary dissolution is where the board of directors and shareholders decide to formally close the corporation and wind up the business. While it can be tempting to save money with the administrative dissolution, formally dissolving the corporation ensures that (1) taxes, fees, and penalties do not continue to accrue against the corporation, (2) shortens the length of time claims can be made, (3) board members and shareholders are protected against personal liability, and (4) the company is not considered a “sham” entity for liability purposes. To avoid legal challenges to the dissolution, the corporation should carefully follow all requirements and procedures set out in the RCWs, the articles of incorporation, and the bylaws keeping detailed records of the dissolution decision and process, particularly any notice provisions and votes on a resolution.

In addition to the legal advantages, formally dissolving the corporation may also preserve board members’ and owners’ business reputations for future ventures. The US corporate system is built on the foundation that you are not your business and if your business ceases to continue, you are able to preserve your business reputation and protect yourself legally.

There are 6 major steps with voluntary dissolution: (1) the board approves a plan of dissolution and proposes dissolution the shareholders; (2) the board notifies and proposes to the shareholders the plan of dissolution and requests a shareholder vote on the plan and the dissolution; (3) the corporation obtains a Revenue Clearance Certificate from the Department of Revenue; (4) filing the Articles of Dissolution with the SOS; (3) the corporation publishes a general public dissolution notice and provides individual notice for disposition of known claims; (5) winding up, where the corporation finalizes its affairs, collects and liquidates its assets, discharges liabilities and debts, and closes agency accounts; and (6) distributes the remaining assets to its shareholders.

Judicial Dissolution, sometimes called the corporate death penalty, is a legal procedure in which a corporation is forced to dissolve or cease to exist. Judicial dissolution is usually prompted when an interested party (such as a shareholder, officer, director, etc.) petitions a court for dissolution on any of the grounds listed in RCW 23B.14.300. A court, however, can unilaterally decide to dissolve a corporation. Judicial dissolution is the rarest form of dissolution, and is typically only applied in cases of internal corporate discord, or outright corporate fraud.

After judicial dissolution, the entity must be closed and the assets liquidated. Only business with the purpose of winding down and liquidating the company may continue after a judicial dissolution proceeding. The corporation must collect assets, dispose of property, discharge, or make provisions to discharge, liabilities, distribute assets to appropriate parties, and do whatever else is necessary to wind down and liquidate the corporation.

 

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 your organization should dissolve. If you have any questions or would like to learn more, please contact Coleman Scroggins at Coleman@apexlg.com or visit our website.

 

 

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