Business entities have an independent and perpetual legal existence separate from their owners. When an entity ceases business operations – whether as a result of a successful sale, failed venture, or other reason – filing a tax return marked “final” does not end that entity’s existence. That existence is only terminated, or dissolved, upon the satisfaction of additional legal requirements. Although most owners do not want to "waste" time or money tending to an already closed business, properly dissolving an entity mitigates the risks of potential liabilities haunting former owners, officers and directors.

Dissolution occurs by obtaining the necessary authority from an entity’s equity holders and/or management and filing the appropriate instruments with governmental authorities. These requirements vary based on the state of formation, the entity type and the governing documents of the entity in question. Once the dissolution process starts, an entity may begin to wind up its legal and business affairs.

Winding up is a complex process governed by the business and corporate laws of the entity’s state of formation and governing documents, as well as relevant tax codes. In addition to filing final tax returns, winding up may involve notifying creditors, closing accounts, canceling licenses, and paying final wages. Once a business is wound up, the company liquidates and distributes its assets.

Liquidation entails selling all of the remaining assets of a company or otherwise converting them into cash equivalents, which are then distributed to the creditors and owners of the business in accordance with the applicable priority of claims, statutes and governing documents. A business may also need to set aside a reasonable reserve for a period of time following its dissolution in order to satisfy potential contingent liabilities. Dissolving entities also need to be counseled on record maintenance requirements.

Whether the end of a business is a dissolution and winding down following a successful exit, the liquidation of a failed venture, or otherwise, proper tax and corporate planning and implementation is essential to reduce potential tax burdens and legal headaches.

For more information on this Client Update, please contact Jeffrey B. Cianciolo, Esq. at (401) 490-0219, or Marcus I. Howell, Esq. at (401) 655-2209.