Winding Up A Business Entity

ENDING THE LIFE OF YOUR COMPANY

There are various reasons that a business owner might want to wind up the business and dissolve the company.  It may be that the owner has sold the productive assets and the company serves no further useful purpose.  It may be that the company isn’t making money, or not enough money, and the owner wants to finish with it before it starts losing money.  It may be that the company is owned by two or more owners who no longer agree and want to liquidate the company and distribute what’s left.  It may be that the company’s assets are not saleable and the owner wants to go into a different line of business or just retire.  Whatever the reason, a going-out-of-business concern should prepare and follow a plan of dissolution and complete the formalities of ending its life.  Otherwise, the principals may find themselves subject to unexpected liabilities or other unwelcome surprises.

THE FORMAL PROCEDURES FOR DISSOLVING A CORPORATION AND A LIMITED LIABILITY COMPANY ARE DIFFERENT, although the goals are the same.  The primary difference is that in the case of a corporation, the dissolution of the company precedes the winding up of its affairs; in fact, once dissolved, the only activities which may be undertaken by the company are those necessary for winding up, i.e. disposing of remaining assets, paying creditors and distributing what is left to the shareholders.  During this process the corporation continues to exist, can sue and be sued, and can engage in any activities necessary to winding up, although it cannot undertake new business.  With an LLC, on the other hand, the winding up is done first – the actual dissolution is the final step, after which the company no longer exists.

IN DISSOLVING A CORPORATION voluntarily, the process is usually initiated by the company’s board of directors’ recommendation to the shareholders who then approve the dissolution, or by unanimous written consent of the shareholders.  Once authorized, the company will take steps to file a  certificate of dissolution with the New Jersey Division of Commercial Recording.  In order to do that, however, the company will first have to obtain a tax clearance certificate from the Division of Taxation.  This is to ensure that all taxes owed to the state get paid.  Application for the tax clearance certificate must include an estimated summary return for the current tax period, as well as a deposit of at least the amount estimated on the return.  In fact, a deposit of twice the estimated amount is frequently included to expedite the issuance of the certificate.  (Excess will be refunded after audit.)  Companies that have never done business or issued shares can use a streamlined procedure which doesn’t require a tax clearance certificate

After paying taxes, the most important part of winding up is paying the company’s creditors.  All creditors must be satisfied before any of the company’s assets can be distributed to the shareholders.  Directors who distribute assets to the shareholders without paying or providing a reserve for known creditors are liable to the company for the benefit of creditors, so it is vital that they take steps to identify current and potential creditors.   Even if  the directors are confident that they are aware of all the company’s creditors, they should carefully review the company’s books and records to be sure.  They should also consult the company’s insurance broker about continuing coverage for foreseeable future claims, particularly product liability claims.

FOR DIRECTORS WHO WANT GREATER CERTAINTY, the law provides for a process to identify the company’s creditors and to bar the assertion of future claims.  This requires notifying all known creditors in writing and advertising in the newspaper that any creditors out there need to present their claims within the ensuing six months or be barred from ever doing so.  Directors sometimes resist this because they do not want to stir up invalid claims or to wait six months.  Also, the bar is not absolute, but it does provide protection to the directors.

WARNING!  Some environmental liabilities are impossible to shed completely.  If there is any possibility that the dissolving company may incur responsibilities under the environmental laws or regulations, an experienced environmental law attorney should be consulted.

Once the creditors have been paid or reserves established for their benefit, the company can distribute its remaining assets to its shareholders.

IN DISSOLVING A LIMITED LIABILITY COMPANY voluntarily, the consent of all members is usually required, although the operating agreement may provide otherwise.  The manager (or managers) then proceeds to wind up the company’s affairs before filing anything with the Division of Commercial Recording.  Again, creditors must be satisfied or provided for before any assets can be distributed to the members.  As with corporations, the law provides for a procedure to identify creditors and bar most future claims, and also provides for liability on the part of  managers who distribute assets to members without providing for creditors.  Members receiving the assets may also be liable.

Once the winding up has been completed and any remaining assets distributed, the life of the LLC is ended by filing a certificate of cancellation with the Division of Commercial Recording.  Unlike  a dissolving corporation, the LLC  does not have to get a tax clearance certificate.

DISCLAIMER –  This article is for general information only and is not intended to provide legal advice or to address specific legal problems.  This article does not create an attorney-client relationship.  For legal advice concerning business transactions and all other legal matters, consult an attorney.

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