- January 24, 2011
- Posted by: Seth Heyman
- Categories: Business Law, Featured
It’s safe to say that not every business enterprise prospers. Statistically speaking, most whither and die in the harsh climate of competitive commerce. Despite their best efforts, officers, directors, and shareholders of an insolvent business must eventually face reality and take steps to terminate it.
When an insolvent business is a corporation or other limited liability entity, participants are often confronted with the question of how and whether to officially dissolve the corporation, or simply abandon the entity. This process, often referred to as a “poor man’s dissolution,” has certain advantages and disadvantages.
Officially dissolving a corporation requires participants to make arrangements for the payment of the corporation’s outstanding debts and obligations, preparing a final tax return, and filing the required dissolution paperwork with the appropriate agency in the state in which the entity is incorporated. Naturally, somebody has to undertake those efforts, and most participants in a failed business would much rather focus their time, money, and effort on more productive pursuits.
Thus, many participants simply elect to abandon the corporation without undertaking any formal or informal procedures, leaving the corporate assets, if any, to the creditors. After enough time has elapsed (usually at least a year or more), the corporation will be administratively dissolved for failure to file reports and pay the required fees and taxes; an easy, quiet death, akin to pulling the plug on a long comatose patient.
The poor man’s dissolution alternative is best suited to those situations in which a corporation is hopelessly insolvent, or has done little or no business at all, with no significant assets and only a few shareholders. This scenario is of course, relatively common, but before you let your corporation go gently into that good night, you must consider the potential for personal liability.
One of the main benefits of incorporating is to protect the personal assets of the participants, and the primary advantage of officially dissolving a corporation is that doing so will continue to protect those assets. With a poor man’s dissolution, there is a significant danger of corporate creditors attempting to hold shareholders personally liable for the corporate debts. There’s nothing more irksome when trying to start afresh than lawsuits filed by creditors of a defunct business.
Therefore, when considering a poor man’s dissolution, you would be wise to make informal arrangements with certain creditors to satisfy at least a portion of their claims against what remains of the corporate assets. For example, in the case of leased property, be certain to give the landlord the immediate right to enter and release the premises, and try to make arrangements with vendors to accept a return of any unsold merchandise.
It is often best to spend some money on a seasoned business attorney to handle these matters. He or she will be more experienced in negotiating with creditors to secure a full release of liability, and will handle the mechanics of the dissolution to make certain that any lingering liabilities are properly addressed.
If closure is important to your peace of mind, a poor man’s dissolution is not for you. Undertaking the steps necessary to properly dissolve a corporation makes it far easier to move on to the venture.