Unfortunately, for many small business owners, the time comes when they must cease operations and dissolve their business. This is often a very stressful time, and the number of steps involved in dissolving a business doesn't make the process any easier. This page outlines the common steps in dissolving a corporation, limited liability company (LLC), or nonprofit corporation.

This information is meant as general information only. It should not be used as a substitute for legal advice. Please seek the services of an attorney, accountant, and/or tax advisor to assist you with the dissolution of your business.

There are six primary steps involved when dissolving a company:

• Corporate action
• Filing articles of dissolution with the state
• Filing all necessary federal, state, and local tax forms
• Statutory notification to creditors
• Settling creditors' claims
• Distribution of remaining business assets

Corporate Action
The owners of the company must approve the dissolution of the business. With corporations, the shareholders must approve this action. With LLCs, the members must grant approval. For small businesses, the shareholders or members are often involved in the day-to-day operations of the business, and therefore know the circumstances leading to the dissolution.

The bylaws of a corporation and the operating agreement of an LLC typically outline the process for dissolution in terms of necessary approvals. To comply with the formalities of a corporation, the board of directors should draft and approve the resolution to dissolve the company. The shareholders should then vote on that resolution once approved by the directors. Both actions should be documented and placed in the corporate record book. While LLCs are not subject to the same formalities, formally documenting the decision to dissolve the LLC and the members' approval is recommended.

Filing the Certificate of Dissolution with the State
After the shareholders or members have voted to dissolve the corporation or LLC, the appropriate paperwork must be filed with the state in which the business was formed. If the business has qualified to transact business in other states, the appropriate paperwork must also be filed in those states.  The process for filing the certificate of dissolution varies by state. Some states require the documents be filed before notifying creditors and resolving claims. Other states require the documents be filed after that process. To learn more about your state's requirements, contact your Secretary of State's office.

Certain states require tax clearance for the company before the certificate of dissolution can be filed. In these cases, any back-taxes owed by the corporation or LLC must first be paid.

File All Necessary Federal, State, and Local Tax Forms
Because you are ceasing operations, your tax obligations do not immediately cease. You must formalize the closing of the business with the IRS as well as your state and local taxing agencies. The IRS web site (http://www.irs.gov/businesses/small/article/0,,id=98703,00.html) includes a checklist for closing a business, which lists the types of forms that may be required, and also includes a link to additional information on state and local requirements. Also, do not overlook payroll reporting obligations if you have employees.

Notification to Creditors
You must notify by mail all of your company's creditors of the dissolution. The notice given should include the following information:

• That your corporation or LLC has been dissolved or has filed the statement of intent to dissolve.
• The mailing address to which creditors must send their claim(s).
• A list of the information that should be included in the claim.
• The deadline for submitting claims (this is often 120 days from the date of the notice).
• A statement that claims will be barred if not received by the deadline.

It is possible that your state may allow for claims from creditors that are not known to the company at the time of dissolution. In these states, notice in the local paper of your company's dissolution may be required. It is best to seek the advice of an attorney regarding what your state mandates.

Settling Creditors' Claims
Claims submitted to the company by creditors can be accepted or rejected by your company. Accepted claims must either be paid or arrangements that are satisfactory to creditor must be made for repayment. For example, it is possible that a creditor may agree to settle the claim for a certain percentage of the original claim amount, such as 80%.

With rejected claims, you must advise creditors in writing that your company rejects their claims. It is advisable to seek the services of an attorney to assist in this process. Your attorney can advise you about the state's statutes governing actions on rejected claims.

Distribution of Remaining Assets
After payment of creditors' claims, the remaining assets may be distributed to the owners of the company. Assets are distributed in proportion to the share of ownership. For example, if you own 80% of the business and your brother owns 20%, you would receive 80% of the remaining assets. Distributions must be reported to the IRS.

If you have a corporation that has multiple classes of stock, such as common and preferred shares, the corporate bylaws typically outline the procedure for distributing assets to these shareholders.  For additional information on the distribution of assets, it is best to contact an accountant or tax advisor. And a final reminder…ask your attorney to assess your contingent liabilities going forward. Perhaps you may have some ongoing exposure (such as product liability, for example) which you can protect yourself from via insurance.