Shutting down your company is a scary prospect. You’ve dedicated so much time to getting it up and running. It’s been there through good and bad times. There’s probably been some fighting and drama at some point. For whatever reason, you’ve come to the conclusion that it’s time to shut it down. Unfortunately, 2020 has brought far too many clients to my door in this situation. Many come to that choice on their own. Others have had their hands forced. And some find themselves in the middle of litigation to wind down their companies.
The legal term is “Corporate Dissolution” and it is an imposing term if you don’t know what it means. I’ve sat down with many clients who have received a lawsuit for “corporate dissolution” who are very worried. They’ve never heard the term before and have no idea what to do next. The law is different in each state, but there are some basic principles you should know about dissolutions.
Voluntary Or Involuntary
A “voluntary” dissolution is when a company chooses to shut its doors. The owners of the company usually come to an agreement that the company should be closed. They work out a schedule for paying off the debts of the company. If there are assets remaining, those are also divided. Finally, the necessary documents are filed with the Secretary of State to close the corporation. This is the most amicable version of shutting down a company.
An “involuntary” dissolution can occur when a company has not paid their taxes. The state where they are incorporated can seek a dissolution of the company for that non-payment. For many, this is not how they intended things to end up.
The most common “involuntary” dissolution proceeding is when one shareholder of the company sues another for dissolution. I’ve seen a variety of reasons over the years. But at its most basic level, the shareholders can’t agree anymore. For whatever reason, the relationships have usually broken down. And if you can’t agree on anything, it’s not normally possible to have a “voluntary” dissolution.
The dissolution by a lawsuit is commonly referred to as a “business divorce.” It is like a divorce between a married couple. Instead of children, the shareholders are often dividing up the company. Just like with a married couple, a business divorce can be very emotional. People may have spent years building up their business. They have devoted themselves to the business. And after the passage of time, they find that their business partner no longer shares their enthusiasm for the business. It can be heartbreaking for the business owner to receive the lawsuit for dissolution.
What Happens In The Lawsuit?
Just like a traditional divorce, every business dissolution case is different. Some businesses have well-planned dissolution proceedings in the case of a shareholder dispute. Other companies never did an operating agreement and are forced to follow the procedures of their state, even though they may not like them. (Side note: you need an operating agreement!)
The lawsuit will attempt to sort out the company’s assets and liabilities. If you have a dispute between the shareholders over how much money each is entitled to, the lawsuit will sort that out as well.
One thing to remember is that a dissolution lawsuit does not mean that a company will automatically be shut down. The end result often will be that the shareholder who brought the lawsuit is “bought out” of their interest in the company. After that is done, the company continues without them.
Finally, these lawsuits normally move quickly, but that’s not always the case. Last year I was on the receiving end of some bombastic language from an adversary who was convinced that his filing of a dissolution case would have my client’s company s shut down within a week or two. It’s now 18 months later and the lawsuit is still going on…
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- What Is An Operating Agreement?
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If you need assistance dissolving your company voluntarily or if you’ve been served with a dissolution lawsuit, give me a call and we can set up a Legal Strategy Session to discuss the process and some next steps to get your matter resolved – (877) AMAYERS.