Key Takeaways

  • A resolution to dissolve an LLC (or corporation) is a formal record of member/shareholder approval to close the business.
  • Dissolution requires following state law and the LLC’s or corporation’s governing documents.
  • Winding up includes paying debts, liquidating assets, and distributing remaining funds to members/shareholders.
  • Failing to formally dissolve can expose members/shareholders to ongoing fees, taxes, and liability.
  • States may involuntarily dissolve an entity for noncompliance, but voluntary dissolution ensures better control and fewer risks.

A shareholder resolution to dissolve corporation agreement is an authorization used when shareholders, during a formal meeting, agree to dissolve the corporation.

Information About Dissolving a Corporation

When the formal meeting is held, the shareholder resolution includes the date of the meeting, notes that a quorum was present and that an agreement was made regarding the dissolution of the corporation. The incorporation of a small business creates a new legal entity that is separate from you in terms or rights and responsibilities. It is also separate from any other person who owns a share of the company.

If the business gets to a point where it is no longer viable or you want to cease operations, you would take the necessary steps to terminate the corporation as a legal entity by dissolving it according to the laws of the state where it is registered. Part of the dissolution process is settling the affairs of the corporation, which includes liquidating any remaining assets held by the corporation.

Differences Between Corporate and LLC Dissolution

While corporations rely on a shareholder resolution to dissolve, LLCs use a member resolution to dissolve LLC. The concept is similar—owners must formally agree to close the entity—but LLCs typically have more flexibility. The LLC’s operating agreement or articles of organization often dictate the voting requirements, such as unanimous consent or a supermajority of members. If the governing documents are silent, state default rules apply. For example, many states require unanimous member approval.

Failing to follow the resolution process may leave the LLC open to disputes or legal challenges, so recording the decision in meeting minutes or a written consent form is strongly recommended.

Dissolution

Each state has its own set of corporate laws that specify the requirements for the dissolution of a corporation. Typically, the dissolution process is as follows:

  • The dissolution is initiated by a resolution by the board of directors who submit it at a meeting of the shareholders.
  • The shareholders each vote and if the resolution is approved, the directors have the authorization to proceed with the dissolution process.
  • The appropriate paperwork is filed with the state, such as articles of dissolution accompanied by a statement that the dissolution was approved by a vote of the shareholders.
  • Depending on the state, a Certificate of Dissolution is filed with the Secretary of State's office once the shareholders approve the decision to dissolve the corporation.
  • In some states, it is also possible for a dissolution of a corporation to be authorized without any action from the board. In this case, all stockholders must consent to the dissolution and can do so by casting their vote in writing.
  • If a minority of the corporation's shareholders vote in favor of a dissolution, no action can be taken. A majority vote is required.
  • Some states allow a shareholder to file a lawsuit to involuntarily dissolve a corporation.

The dissolution of a corporation is not in effect until all steps have been taken to complete any outstanding business affairs of the corporation. This includes collecting all corporate assets, selling those assets that will not be distributed to the shareholders, and arranging the satisfaction of the corporation's outstanding debts and obligations.

A clearance is usually required from the state's taxing authority noting that the state taxes owed by the corporation have been paid. It may also note that no taxes are owed.

Formal Steps in Dissolving an LLC

The process of dissolving an LLC usually includes:

  1. Member Resolution: The LLC members vote on a resolution to dissolve LLC operations. The vote must follow the procedure outlined in the operating agreement or state law.
  2. File Articles of Dissolution: Once approved, members must file articles (or a certificate) of dissolution with the Secretary of State. This formally notifies the state of the LLC’s intent to close.
  3. Notify Creditors and Stakeholders: Some states require LLCs to notify creditors in writing, giving them an opportunity to submit claims. Even when not mandatory, this protects members from future liability.
  4. Tax Filings and Clearances: States often require proof that all state and federal taxes, including employment and sales taxes, are paid. While some states (e.g., Florida) don’t mandate tax clearance, filing final returns and checking the “final return” box on IRS forms is best practice.
  5. Cancel Licenses and Permits: Business licenses, permits, and registrations tied to the LLC should be closed to prevent ongoing fees or liabilities.

Liquidation

When all of the assets of the corporation have been sold, it has been liquidated. Once corporate assets have been liquidated, they are distributed, which can be in the form of cash or property, to the corporation's shareholders. They, in turn, exchange their shares of stock in the corporation for their share of the liquidated assets. Once the distribution of the assets to the shareholders is complete, this constitutes the final step in the dissolution of the corporation.

If a resolution of the corporation's outstanding debts and/or obligations were handled and resolved, shareholders are not liable for any corporate debts. The state law generally holds each shareholder liable for corporate debts that remain unpaid up to the value of the assets that were distributed to the shareholder.

Order of Paying Debts and Distributing Assets

When liquidating an LLC, debts and assets must be handled in a specific order, usually mandated by state law:

  1. Pay Creditors – including outside creditors and members who are also creditors.
  2. Return Member Contributions – any capital contributions not previously repaid are returned to members.
  3. Distribute Remaining Assets – remaining funds or property are divided among members based on their ownership interests or as specified in the operating agreement.

For example, if an LLC with three equal members has $100,000 in assets after liquidation, it must first settle all debts. If $15,000 goes to creditors, the remainder is split according to the ownership percentages—often equally unless otherwise specified.

Dissolution by the State

Corporations must adhere to state law requirements if it is to remain in good standing and continue to exist. For example, corporations are required to submit an annual informational report. If the corporation fails to submit the required report, its operations in that state are suspended. If the failure to report is not rectified in a timely manner, the state has the authority to administratively dissolve the corporation and terminate its existence.

Laws vary from state to state and how the state where your corporation is registered will determine how the dissolution is processed. In general, it may be treated as a liquidation followed by a distribution of the assets to the shareholders. If the state takes steps to dissolve the corporation, it may result in negative tax consequences for the shareholders.

Consequences of Failing to Properly Dissolve

If members fail to pass a resolution to dissolve LLC operations and complete the required filings, the entity remains active on state records. This can lead to:

  • Ongoing Fees and Taxes: States may continue to assess annual franchise taxes, penalties, and late fees.
  • Administrative Dissolution: States can involuntarily dissolve an LLC for noncompliance, which may harm the members’ liability protections.
  • Loss of Control: Without voluntary dissolution, members may face lawsuits, creditor claims, or even court-ordered dissolution.

Voluntary dissolution, through a properly executed resolution and filing, ensures a clean break and avoids lingering financial and legal obligations.

Frequently Asked Questions

  1. What is a resolution to dissolve an LLC?
    It is a formal document recording member approval to close the LLC, following the operating agreement or state law.
  2. Do all members have to agree to dissolve an LLC?
    Not always. The LLC’s operating agreement may require unanimous consent or a majority vote. If silent, state law often requires unanimous approval.
  3. What happens after members approve dissolution?
    The LLC must file articles of dissolution with the state, settle debts, liquidate assets, and distribute remaining funds to members.
  4. Do I need tax clearance before dissolving an LLC?
    Some states require tax clearance, while others, like Florida, do not. Regardless, it’s important to file final tax returns and settle any liabilities.
  5. What if I don’t file a resolution or articles of dissolution?
    Your LLC may continue to incur state fees, taxes, and penalties, and members could face liability if creditors are not properly notified.

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