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 North Carolina 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 North Carolina. 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 or pay fees or penalties, 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, those procedures are not covered in this article.
North Carolina’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. Keep in mind that you are required to give notice to each shareholder, whether or not entitled to vote, of the proposed meeting on dissolution. Then, unless your articles of incorporation, bylaws, 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. 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 all shareholders entitled to vote on dissolution provide their written consent. In addition, your articles of incorporation may provide that you can dissolve by getting the written consent of the same number of shares as would otherwise be needed at a meeting. In the latter case, unless your articles of incorporation, bylaws, or board of directors required a greater vote, you would need to get written consent from a simple majority of shares in order to dissolve. In either case—getting consent from all voting shares or only from a certain majority of shares—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 records. Dissolution based on written consent can be more efficient for small businesses where most or all of the shareholders are directors—and there is general agreement on dissolution. If you use this method, you generally must give any non-consenting shareholders at least 10 days advance notice before recording the consent, as well as notice of the dissolution to all shareholders no more than 10 days after the date the consent is recorded.
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)
- generally subject the corporation’s directors and 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
- abate or a suspend a legal proceeding pending by or against the corporation on the effective date of dissolution; or
- terminate the authority of the corporation’s registered agent.
Articles of Dissolution
After dissolving your corporation, you should file articles of dissolution with the Secretary of State (“SOS”). The BCA does not strictly require you to file this document, instead stating that a corporation “may” file the articles. However, for various reasons, including limiting liability and terminating various filing requirements, filing articles of dissolution is generally the best practice. (If you have specific questions about whether to file, you should contact a local attorney.)
To complete the articles of dissolution, you must provide:
- the name of your corporation
- the names and addresses of the corporation’s officers
- the names and addresses of the corporation’s directors
- the date dissolution was authorized; and
- a statement that shareholder approval was obtained as required by the BCA.
There is a $30 fee to file the articles. An articles of dissolution form (Form B-06) is available for download from the SOS website. You can file by mail, in person, or online. If you file in person, the SOS asks that you include their cover sheet form, which is also downloadable from the SOS website. For online filings, you will need to set up an online account with the SOS. Your filing usually will be processed in within seven to ten business days. Various forms of expedited processing are available for additional fees.
Be aware that 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 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 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
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 five 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.
North Carolina 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, filing fees, and instructions for setting up an online account, 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.