Closing your Texas corporation will involve a variety of tasks.Among the most important are what is known as winding up and terminating the business.
Unlike pretty much every other state in the country, Texas’ laws governing corporations are not simply contained in a Business Corporation Act, but instead appear in various parts of the state’s Business Organizations Code (“BOC”).The BOC governs all “domestic entities,” including not only for-profit corporations, but also LLCs, non-profit corporations, and partnerships.
Portions of the BOC covering the winding up of domestic entities have been revised, with the revisions becoming effective September 1, 2013.This article is based on the revised statute.
Important:Because of the particular complexities of Texas law regarding the termination of Texas business entities, you should not rely solely on this article, but instead are advised to seek expert assistance from a knowledgeable Texas business attorney.
Triggering the Winding Up of Your Corporation
Your corporation is registered with the State of Texas.In order to officially end its existence as a state-registered business entity, and put it beyond the reach of creditors and other claimants, you first need to initiate a series of final tasks that collectively are known as “winding up” the company.While a corporation may be required to wind up involuntarily by a court decree, or may be involuntarily terminated by the Secretary of State for failure to file annual reports, this article covers voluntarily winding up the corporation through the action of its shareholders.Also, while there are special procedures for winding up corporations that have not yet issued stock or started doing business, those procedures are not covered in this article.
It’s worth noting that in other states, the action that directly precedes, and leads into, winding up a corporation, such as a formal vote to dissolve by the shareholders, is called “dissolution.”The BOC, however, tends to avoid the word “dissolution,” and instead speaks more generally of various possible events that would “require” the winding up of a Texas business entity (such as a voluntary decision to wind up the entity).
Under the BOC, there are two main methods to approve a voluntary winding up of a corporation:
- action by the board of directors followed by a shareholder vote; and
- written consent of all shareholders.
Under the first method, your board of directors adopts a resolution recommending the winding up of the corporation and directing that the proposal be submitted to the shareholders. The shareholders must then vote on the issue of winding up at a shareholder meeting.You are required to give at least 10 days advance notice of the proposed meeting to each shareholder entitled to vote.Then, unless your corporation’s certificate of formation provides otherwise, approval of the winding up requires a two-thirds majority of the shares entitled to be cast on the matter.(If your corporation has shares, classes, or series that are entitled to vote separately, then at least two-thirds of the shares in each class must approve the winding up.)Make sure to properly record both the board’s resolution and the shareholders’ votes.
Under the second method, all shareholders should sign a document, often known simply as a “consent,” giving their consent for the winding up.The consent should be properly entered in the corporation’s records.Initiating winding up by written consent can be more efficient for small businesses where most or all of the shareholders are directors—and there is unanimous agreement on dissolution.You should consider getting a business attorney to assist you in preparing the consent.
After the shareholders have given their approval, your corporation continues to exist only for the purpose of winding up. Under the BOC, key winding up tasks include:
- sending a written notice of the winding up to each known claimant against the corporation
- prosecuting and defending lawsuits
- collecting and selling corporation property to the extent the property is not to be distributed in kind to shareholders
- applying and distributing corporation property to discharge, or making adequate provision for the discharge of, all of the corporation’s liabilities and obligations; and
- distributing any remaining corporation property 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.
You should consult with a business attorney for guidance on how to properly notify people you know to have claims against your corporation.
When you have completed winding up your corporation, you must file a certificate of termination (discussed just below).However, you must first obtain a certificate of account status (Form #05-305) from the Comptroller of Public Accounts (“CPA”) indicating that all necessary taxes have been paid and your corporation is in good standing for the purpose of termination.To obtain the required certificate, you must file Form 05-359 (Request for Certificate of Account Status) with the CPA.You can find the request form, along with other relevant information, on the CPA website.It will take 4-6 weeks for the CPA to process your request.Once you receive your certificate of account status, you will need to attach it to your certificate of termination.
For federal tax purposes, check the “final return” box on your IRS Form 1120 (for traditional corporations) or IRS Form 1120S (for S corporations).
Certificate of Termination
After you have wound up your corporation and obtained your certificate of account status from the CPA, you must file a certificate of termination with the Secretary of State (“SOS”).Form 651, which includes a certificate blank of termination and instructions, is available for download from the SOS website.
To complete the certificate, you’ll need to provide:
- ·your corporation’s name
- ·a statement that your business is organized as a for-profit corporation under Texas law
- ·the date your corporation was formed
- ·the file number issued by the SOS for your corporation
- ·the names and addresses of at each of your corporation’s directors
- ·a statement of the nature of the event requiring winding up (“a voluntary decision to wind up the entity has been approved in the manner required by the BOC and by the governing documents of the entity”); and
- ·a statement that your corporation has complied with the provisions of the BOC governing its winding up.
In addition, the SOS’s instructions for the certificate of termination state that you should provide the effective date for the certificate, which may be:(a) the filing date; (b) a date not more than 90 days from the date the certificate is signed; or (c) the date of the occurrence of a specified future event.
Remember: You must attach your certificate of account status to your certificate of termination.
There is a $40 fee to file the certificate.Your filing usually will be processed within 3-5 business days.There is also an option to file the certificate of termination online (this requires that you have an image of your certificate of account status saved on your computer that you can upload to the SOS website).
Be aware that your business name will become available for use by others once your certificate of termination is processed.
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.
You can find additional information, such as forms, mailing addresses, filing fees, and access to the online filing system 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.