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 Pennsylvania corporation, you’ll need to take care of multiple tasks—including what is called dissolving and winding up your business.
NOTE: The law governing dissolution of Pennsylvania corporations, known as the Business Corporation Law of 1988 (“BCL”), contains two different methods for handling claims against a dissolving corporation. Under one method, contained primarily in Section 1975 of the BCL, a corporation provides for “liabilities” (claims against the corporation) before filing articles of dissolution. Under the other method, contained in Subchapter H of the BCL, a corporation provides for these liabilities after filing articles of dissolution. Both methods are briefly covered in this article. You should strongly consider consulting with an attorney before dissolving your corporation to determine which approach to handling claims makes the most sense in your particular case.
Dissolving the Corporation
Your corporation is registered with the State of Pennsylvania. 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 order, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are streamlined procedures for dissolving corporations that have not yet started doing business, those procedures are not covered in this article.
The BCL provides for voluntary dissolution through either of two methods:
- action by the board of directors followed by a shareholder vote; or
- written consent of all shareholders.
Under the first method, your board of directors adopts a resolution recommending that the corporation be voluntarily dissolved. Among other things, the resolution must state whether the dissolution will proceed under Section 1975 of the BCL or under Subchapter H of the BCL. The shareholders then must vote on the proposed dissolution at a shareholder meeting. You are required to give at least 10 days advance notice of the meeting to each shareholder entitled to vote on the proposal. At the shareholder meeting, approval of the dissolution requires a majority of the votes cast on the proposal. (If you have share classes entitled to vote separately, then a majority of the votes cast in each class must approve the proposal.) Make sure to properly record both the board’s resolution and the shareholders’ votes.
To use the second method, you should get signatures from all shareholders on a consent form. If you use this method there should be no need for separate action by the board of directors. This method can be more efficient for small businesses where all or most of the shareholders are also directors, and where there is unanimous agreement regarding dissolution.
Certain Matters are Unchanged by Dissolution
Note that dissolution, alone, does not:
- subject the corporation’s directors and officers to standards of conduct different from those that applied before dissolution; or
- eliminate or impair any claim by or against the corporation or its directors, officers, or shareholders for a period of up two years after the date of 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, which states that winding up should proceed “as speedily as possible,” key winding up tasks include:
- collecting all sums due to the corporation
- converting into cash all corporate assets the conversion of which into cash is required to discharge corporation liabilities
- discharging or making adequate provision for discharging all of the corporation’s liabilities; and
- distributing any surplus remaining to the shareholders according to their respective rights and 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 Claimants
One other key task is giving notice of your corporation’s dissolution to anyone who may have claims against it. As mentioned above, there are two different methods in the BCL for providing for claims, one under Section 1975 (“pre-dissolution”) and the other under Subchapter H (“post-dissolution”). Your choice of which method to use, which you should make in consultation with an attorney, will dictate when and how you give notice.
Section 1975. Under Section 1975, after the shareholders have approved the dissolution, you must “immediately”:
- publish notice of the winding up proceedings
- send notice to each known creditor and claimant by certified or registered mail; and
- send notice to each municipal corporation in Pennsylvania where your corporation has a place of business by certified or registered mail.
You should strongly consider getting assistance from a business attorney to properly prepare the required notices.
Subchapter H. Under Subchapter H, after you have finished winding up the corporation, and have filed articles of dissolution (see below), you must both publish a notice and send the same notice to known claimants. The notice must state:
- that all claims must be presented in writing and must contain sufficient information to reasonably inform the corporation or successor entity of the identity of the claimant and the substance of the claim
- the mailing address to which a claim must be sent
- the deadline, which shall be not less than 60 days after the date the notice is given, by which the corporation or successor entity must receive the claim
- that the claim will be barred if not received by the deadline; and
- that the corporation or a successor entity may make distribution to other claimants and the shareholders of the corporation or persons interested as having been such without further notice to the claimant.
There are a variety of other rules regarding this notice, such as where it must be published and how it must be sent to known claimants. In addition, there are significant additional rules regarding how claims are to be handled. Therefore, if you are giving claimants notice under Subchapter H, you should strongly consider working with a business attorney.
Pennsylvania has unique, tax-related requirements that you must fulfill before you can finish closing your corporation. You cannot complete the final step of filing articles of dissolution (see below) until you have paid all required state taxes, filed all required corporate tax reports/returns up to the time you ceased doing business and distributed assets, and then received clearance from the Department of Revenue (DOR) and the Department of Labor and Industry (DLI). To obtain the necessary tax clearance certificates, you must file DOR Form REV-181 (Application for Tax Clearance Certificate), including a Distribution of Assets Schedule, with the DOR and DLI. You should complete, but not sign, the form, make one copy, sign each copy separately, and then mail one signed copy apiece to each of the two agencies. You can find more detailed instructions, including mailing addresses, by downloading the informational document found at this DOR link. Be aware that it can take a month or more to receive your tax clearance certificates from the DOR and DLI.
For federal tax purposes, check the “final return” box on your IRS Form 1120 (for traditional corporations) or IRS Form 1120S (for S corporations).
Articles of Dissolution
After dissolving and winding up your corporation, including obtaining the necessary tax clearance certificates, you must file articles of dissolution with the Department of State (“DOS”). The articles must contain:
- the name of your corporation
- the address of your corporation’s registered office
- the statute under which the corporation was incorporated and the date of incorporation
- the names and addresses, including number and street, of the corporation’s directors and officers
- the manner in which the proposal to dissolve voluntarily was adopted by the corporation (for example, “adoption by the shareholders by unanimous written consent pursuant to 15 Pa.C.S. § 1905”)
- a statement that either (a) all liabilities of the corporation have been discharged, (b) adequate provision has been made for the discharge of the corporation’s liabilities, (c) the assets of the corporation are not sufficient to discharge its liabilities, and all the assets of the corporation have been fairly and equitably applied, as far as they will go, to the payment of such liabilities, or (d) the corporation has elected to proceed under Subchapter H
- a statement that either (a) all the remaining assets of the corporation, if any, have been distributed as provided in the BCL, or (b) the corporation has elected to proceed under Subchapter H and any remaining assets of the corporation will be distributed as provided in that subchapter
- if you are not notifying claimants using the method in Subchapter H, a statement that no actions or proceedings are pending against the corporation in any court, or that adequate provision has been made for the satisfaction of any judgment or decree that may be obtained against the corporation in each pending action or proceeding the date dissolution was authorized
- if you are notifying claimants using the method in Subchapter H, a statement that notice of the winding-up proceedings of the corporation was mailed by certified or registered mail to each known creditor and claimant and to each municipal corporation in which the corporation has a place of business in Pennsylvania; and
- the signature of a duly authorized officer.
There is a $70 fee to file the articles. Make sure to include your tax clearance certificates. Your filing usually will be processed in about one week.
Be aware that your business name will become available for use by others immediately after dissolution.
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.
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.
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.