For some corporations, a time comes when the people who own and run things voluntarily decide to close the business. If you’ve reached that point with your Alabama corporation, you’ll need to take care of multiple tasks—including what is called dissolving and winding up your business.
Dissolving the Corporation
Your corporation is registered with the State of Alabama. Officially ending its existence as a state-registered business entity, and putting it beyond the reach of creditors and other claimants, begins with a formal process called “dissolution.” While a corporation may be involuntarily dissolved through a court decree, or for administrative reasons such as failing to file annual reports or pay franchise taxes, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are streamlined procedures for dissolving corporations that have not issued stock or not started doing business, those procedures are not covered in this article.
Alabama’s Business Corporation Law (“BCL”) provides for voluntary dissolution through a shareholder vote at a shareholder meeting. Before the vote, your board of directors must submit a proposal to dissolve to the shareholders. You are required to give ten days advance notice to each shareholder, whether or not entitled to vote, of the proposed meeting to consider dissolution. Unless your articles of incorporation or board of directors require a greater or lesser majority vote or a vote by voting groups, a two-thirds majority of all votes entitled to be cast must approve the dissolution. (If voting by voting groups is required, a two-thirds majority of votes in each group must approve the dissolution.) If you use this method, make sure to properly record both the board’s proposal and the shareholders’ votes.
The BCL also allows you to avoid a formal shareholder vote at a meeting if all shareholders entitled to vote on dissolution provide their written consent. The voting shareholders all must sign a document, known simply as a “consent,” that states the corporation is dissolved. The consent then must be properly entered in the corporation’s records. You must give notice of the action to dissolve by written consent to all nonvoting shareholders at least 10 before the action is taken. Dissolution based on written consent can be more efficient for small businesses where most or all of the voting shareholders are directors—and there is unanimous agreement among these shareholders on dissolution.
Certain Matters are Unchanged by Dissolution
Note that dissolution, alone, does not:
- generally alter the limited liability status of the corporation’s subscribers and shareholders
- transfer title to the corporation’s property
- prevent transfer of corporation shares (although the authorization to dissolve may provide for closing the corporation’s share transfer records)
- generally subject the corporation’s directors or officers to standards of conduct different from those that applied before dissolution
- change quorum or voting requirements for the corporation’s board of directors or shareholders, change provisions for the selection, resignation, or removal of directors or officers or both, or change provisions for amending the corporation’s bylaws or articles of incorporation
- prevent the commencement of a proceeding by or against the corporation in its corporate name
- abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution
- terminate the authority of the corporation’s registered agent; or
- result in the corporation's name becoming available for use by another entity until the time for revocation of dissolution (120 days) has elapsed.
Articles of Dissolution
After dissolving your corporation, you should file articles of dissolution with the Office of the Judge of Probate in the county where the corporation’s certificate of formation was recorded. The BCL does not strictly require you to file this document, instead stating that a corporation “may” dissolve by filing the articles. However, for various reasons, including limiting liability and terminating various filing requirements, filing articles of dissolution is generally the best practice. (In short, if you don’t file articles of dissolution, you won’t be completing the voluntary dissolution of your corporation.)
To complete the articles of dissolution, you must provide:
- the name of your corporation
- the date dissolution was authorized
- the number of votes entitled to be cast on the proposal to dissolve and either (a) the total number of votes cast for and against dissolution, or (b) the total number of undisputed votes cast for dissolution and a statement that the number cast for dissolution was sufficient for approval
- if voting by voting groups was required, the information listed in the previous listed item separately provided for each voting group entitled to vote separately on the plan to dissolve; and
- if dissolution was approved by written consent of all shareholders, a statement to that effect in lieu of the information required regarding shareholder votes, and a copy of the written consent or consents signed by all shareholders of the corporation.
An articles of dissolution form is available for download from the Secretary of State (“SOS”) website. If you use the SOS form—which is recommended—you are also required to provide your corporation’s Alabama Entity ID Number and the name and address of the preparer of the form. The SOS form also includes a sheet where you can provide payment information.
There are two fees required to file the articles: one payable to the SOS and one payable to the Judge of Probate. The SOS fee is $100. You will need to check with the appropriate Judge of Probate’s office for its fee. You must submit the original signed articles along with two copies and the necessary payments to the Judge of Probate’s office. Your filing usually will be processed in about one week. Expedited processing is available from the SOS for an additional $100 fee.
Your business name will become available for use by others 120 days after dissolution.
Following dissolution, your corporation continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as “winding up” the company. It may be appropriate to designate one or more officers and/or directors to handle the winding up.
Under the BCL, key winding up tasks include:
- collecting the corporation's assets
- disposing of corporation properties that will not be distributed in kind to shareholders
- discharging or making provision for discharging the corporation’s liabilities; and
- distributing remaining corporation property among shareholders according to their interests.
Regarding the last two listed items, be aware that your corporation’s first obligation is to discharge liabilities. This includes paying all business taxes and creditors. Only then may the corporation distribute remaining assets to shareholders.
Notice to Creditors and Other Claimants
Unlike virtually every other state’s business corporation laws, the current BCL, which became effective January 1, 2011, does not clearly lay out rules for if or how corporations may or must provide notice of dissolution to persons who have claims against a corporation. Therefore, you should strongly consider consulting with a local business attorney regarding this issue.
An S corporation is a corporation that has filed an election with the IRS to have business income, losses, deductions, and credits pass through to individual shareholders for federal tax purposes. Only the shareholders, and not the corporation, pay federal taxes on income from the business. Potential tax issues aside, the process for dissolving and winding up an S corporation is generally the same as dissolving and winding up a traditional corporation.
Alabama does not require that you obtain tax clearance before dissolving your corporation.
For federal tax purposes, check the “final return” box on your IRS Form 1120 (for traditional corporations) or IRS Form 1120S (for S corporations).
Is your corporation registered or qualified to do business in other states? If so, you must file separate forms to terminate your right to conduct business in those states. Depending on the states involved, the form might be called a termination of registration, certificate of termination of existence, application of withdrawal, or certificate of surrender of right to transact business. Failure to file the additional termination forms means you’ll continue to be liable for annual report fees and minimum business taxes.
You can find additional information, such as forms, mailing addresses, and filing fees, on the SOS website.
For information on dissolving and winding up corporations formed in other states, check Nolo’s 50-state series on dissolving corporations.
Final Note: Dissolving and winding up your corporation is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.