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 Kentucky 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 Kentucky. 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 an annual report, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are streamlined procedures for dissolving corporations that have not yet issued stock or not yet started doing business, those procedures are not covered in this article.
Kentucky’s Business Corporation Act (“BCA”) 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 vote or a vote by voting groups, a majority of all votes entitled to be cast must approve the dissolution. If you use this method to dissolve, make sure to properly record both the board’s proposal and the shareholders’ votes.
The BCA also allows you to avoid a formal meeting and vote if shareholders entitled to vote provide their written consent to dissolve. There are two ways written consent can operate to approve dissolution. First, unless otherwise provided in your articles of incorporation, dissolution is approved if all shareholders entitled to vote provide their consent. Second, if permitted by your articles of incorporation, dissolution may be approved by the consent of shareholders representing 80% of the votes entitled to be cast, or such higher percentage of votes as may be required by your articles of incorporation. Regardless of whether all shareholders or only a certain majority must provide consent, the required number of shareholders 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 nonvoting shareholders at least 10 days advance notice of the action to dissolve. In addition, if you do not have unanimous consent of the voting shareholders, you must also give at least 10 days advance notice of the action to dissolve to all voting shareholders who did not consent. 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 either unanimous agreement on dissolution, or, where permitted, nearly unanimous agreement on dissolution.
Certain Matters are Unchanged by Dissolution
Note that dissolution, alone, does not:
- 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)
- 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
- prevent the commencement of a legal proceeding by or against the corporation in its corporate name
- abate or suspend a legal proceeding pending by or against the corporation on the effective date of dissolution
- terminate the authority of the corporation’s registered agent
- change the corporation’s legal obligations and responsibilities regarding federal and state taxes; or
- abate or suspend the BCA’s rules for liability of shareholders in relation to issuance of shares.
Articles of Dissolution
After the shareholders approve the dissolution of your corporation, you should file articles of dissolution with Secretary of State (“SOS”). The BCA 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; and
- 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, you must provide the information in the last listed item, regarding numbers of votes cast, separately for each voting group.
An articles of dissolution form (Form DIS, Articles of Dissolution) is available for download from the SOS website. The form includes spaces for the required information listed above. If your dissolution is authorized by written consent, you should consult with an attorney for guidance on how to prepare your articles of dissolution. More generally, the SOS states that if its printed form won’t work for your particular situation, you should entirely disregard the form and draft your own articles.
An officer or the chairman of your corporation’s board must sign the articles. The filing fee is $40. You must submit the signed original along with three exact copies. Your filing usually will be processed within three business days.
Note that your business name will become available for use by others 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 BCA, 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 corporation liabilities (including, as appropriate, entering into agreements with creditors for the satisfaction of those 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
One other key task is giving notice to creditors and other claimants of your corporation’s dissolution. Giving notice is optional. However, doing so will help limit your liability and also allow you to more safely make final distributions to shareholders.
Under the BCA, one way to give notice is by sending a written document directly to known claimants after dissolution. Proper written notice must:
- describe information that must be included in a claim
- provide a mailing address where a claim may be sent
- state the deadline, which may not be fewer than 120 days from the effective date of the written notice, by which the dissolved corporation must receive the claim; and
- state that the claim will be barred if not received by the deadline.
You also may give notice to unknown (potential) claimants by publishing in a newspaper. As with sending direct notice to known claimants, there are specific rules for giving notice through publication. Generally speaking, claimants have two years after the date of newspaper publication to bring a claim.
Some of the rules for giving notice and responding to claims can be hard to understand. Therefore, if you choose to give claimants notice, you should strongly consider getting assistance from a business attorney.
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.
Kentucky does not require that you obtain tax clearance before filing to dissolve your corporation. The SOS will send one of the copies of your articles of dissolution to the Department of Revenue.
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, instructions, mailing addresses and phone numbers, 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.