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Corporate Dissolution Explained

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Opening a business is one of the most exciting and challenging experiences of an entrepreneur’s life, but closing a business often comes with very different emotions. For many, the choice to dissolve a company happens because of new job opportunities, retirement, or other exciting new ventures, and the process of corporate dissolution can feel like a significant chore that must be done before moving on. In other situations, a company may be forced to dissolve due to legal concerns. A business litigation attorney is critical to the success of navigating legal claims that arise due to a company’s dissolution or are brought against the business during the process.

How to Dissolve a Business

Corporate dissolution can come about in a number of different ways, either voluntarily or involuntarily. To voluntarily dissolve a company, the owner or shareholders can file a Notice of Dissolution with the Secretary of State or as ordered by the court after a vote. Corporate dissolution can also be ordered involuntarily through government action if the business fails to pay its taxes. Whether voluntarily or involuntarily, a business litigation attorney can help you through the corporate dissolution process and handle any legal issues that arise along the way.

The first step after the formal vote to dissolve a business or a judicial order for involuntary dissolution is liquidating the company’s assets. This means that the company sells any assets that are not being used as collateral for loans. Property being used as collateral must either be turned over to the institution holding the property as collateral or paid off and sold specifically to cover that debt. If the company is solvent at the time of dissolution, any remaining money from liquifying assets is given back to the owners and shareholders as profit.

The third step in corporate dissolution is settling any outstanding debts with creditors. This includes paying off all liabilities that were incurred prior to the closing of the business and include all goods and services paid for as well as long and short-term debts. A business litigation attorney can be crucial during this step for negotiating with outstanding creditors, settling claims, and handling any other legal issues that may arise with creditors who have claims against the assets of your dissolving corporation.

In addition to paying off all known liabilities, notice must be given to any and all interested parties in the dissolution of the company. This includes creditors, shareholders, owners, customers, employees, and any other interested entities in the business. A final legal notice gives all interested parties the opportunity to bring any final claims against the business and notifies the government that taxes will no longer be paid for the business. The last step is filing the dissolution paperwork for ending your company with the articles of dissolution which formally end the entity’s existence. These are the exact opposite documents of the articles of incorporation, which you filed with the Secretary of State when you formally created the business.

Common Disputes in Corporate Dissolution

Dissolving a business can happen smoothly and quickly if all partners or shareholders are equal partners in the business. However, if people own unequal shares of the corporation, one or more parties violated a fiduciary duty, or decisions were made that were not in agreement with the entirety of owners, legal disputes can arise while corporate dissolution is taking place. Some of the most common claims filed by fellow owners or shareholders during corporate dissolution include the following:

  • Lack of experience
  • Inadequate capital
  • Poor location
  • Poor inventory management
  • Over-investment in fixed assets
  • Bad credit arrangements
  • Personal use of business funds
  • Unexpected growth
  • Competition
  • Low sales

Oftentimes, minority shareholders or partners may file lawsuits claiming unfair compensation plans, denial of management participation, or other wrongful acts during the dissolution of the company. Other common legal claims that can arise during corporate dissolution include accusations of fraud, breach of fiduciary duty, corporate waste, breach of contract, improper advantage or usurping the corporation, and causing bankruptcy. These claims can be made by a single person or by a group of interested people invested in the business. You need an experienced business litigation attorney to represent your interests during the process and protect your personal and professional interests against liability.

Navigating Corporate Dissolution Disputes

When a dispute arises during corporate dissolution, the first course of action is to have a business litigation attorney review the articles of incorporation, bylaws, and shareholder or partnership agreements. Oftentimes, these documents provide the steps for resolving legal issues between owners or shareholders of the company. They also often dictate solutions for issues that come up during the dissolution process, such as compensation and voting rights. If these documents do not contain the answer to your legal dispute, your attorney can file a lawsuit and begin negotiations with the other partners or shareholders involved in the dissolution to try and resolve the matter. If negotiations fail, a business litigation attorney can take your case to court and make the best possible arguments for your case.

A business litigation attorney is also incredibly helpful in resolving claims against your corporation during the dissolution process. Once corporate dissolution begins, any claimant with an existing claim against the company is allowed to continue their case, but new claims only have a small window of time in which to file a lawsuit once the dissolution process begins. A business litigation attorney can help you resolve all outstanding claims with creditors, employees, and others who have existing lawsuits as well as ensure that no new claims are made against the corporation once the dissolution occurs. Your attorney can go to court and bar new actions that may create liability for you and your fellow owners.

 

Laine Wagenseller is a Los Angeles-based real estate litigation trial attorney.  He is the founder of Wagenseller Law Firm in downtown Los Angeles which specializes in lawsuits involving properties and partnerships.  The lawyers at Wagenseller Law Firm have handled many neighbor disputes involving ownership issues, easements and licenses. For more information please call the firm at (213) 286-0371.

 

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