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 Virginia 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 Commonwealth of Virginia.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 automatically terminated for failing to file an annual report or pay a fee, this article covers voluntary dissolution by a corporation’s shareholders.Also, while there are streamlined procedures for terminating corporations that have not yet issued stock or not yet started doing business, those procedures are not covered in this article.
Virginia’s Stock Corporation Act (“SCA”) 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 at least ten days advance notice to each shareholder, whether or not entitled to vote, of the meeting to consider dissolution.Then—unless your board of directors requires a greater vote—a two-thirds majority of all votes entitled to be cast must approve the dissolution.If you use this method, make sure to properly record both the board’s proposal and the shareholders’ votes.
The SCA also allows you to avoid a formal meeting and vote if shareholders entitled to vote on dissolution provide their written consent.By default, all shareholders entitled to vote must provide their consent in order to approve dissolution.However, if specifically authorized by your articles of incorporation, you may need the consent of only a lesser majority of shares to approve the dissolution.Regardless of whether all shareholders or only a majority must provide consent, the required number of shareholders must sign a document that states the corporation is dissolved.This document, known simply as a “consent,” then must be properly entered in the corporation’s records.There are also additional rules regarding giving notice of the action to dissolve to various shareholders; these rules vary depending on whether all voting shareholders are giving consent, or only a majority of voting shareholders.In some cases notice is required prior to the consent being recorded and becoming effective, in other cases notice is only required afterwards.(You should consider consulting with a lawyer for more details.) In cases of unanimous consent of the voting shareholders, no action by the board of directors is required.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.
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 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 or articles of incorporation
- ·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 the Commonwealth (“SOC”).The SCA 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 one of the following pieces of information about the manner of dissolution:
- ·a statement that dissolution was authorized by unanimous consent of the shareholders; or
- ·a statement that the proposed dissolution was submitted to the shareholders by the board of directors in accordance with the SCA, along with statements of (a) the designation, number of outstanding shares, and number of votes entitled to be cast by each voting group entitled to vote separately on dissolution, and (b) either the total number of votes cast for and against dissolution by each voting group entitled to vote separately on dissolution or the total number of undisputed votes cast for dissolution separately by each voting group and a statement that the number cast for dissolution by each voting group was sufficient for approval by that voting group..
This may sound complicated.However, an articles of dissolution form—including helpful instructions—is available for download from the SOC website.If you use the SOC form—which is recommended—you will probably find it easier to understand what information is required.There is a $10 fee to file the articles.
Also, bear in mind that you must have paid all fees and taxes due to the SOC before it will complete processing of the articles and issue the necessary certificate 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 SCA, 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 SCA, one way to give notice is by sending a written document directly to known claimants after dissolution.Proper written notice must:
- ·provide a reasonable description of the claim that the claimant may be entitled to assert
- ·state whether the claim is admitted, or not admitted, and if admitted (a) the amount that is admitted, which may be as of a given date, and (b) any interest obligation if fixed by an instrument of indebtedness
- ·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 confirmation of the claim must be delivered to the dissolved corporation; and
- ·state that, except to the extent that any claim is admitted, the claim will be barred if written confirmation of the claim is not delivered by the deadline.
The SCA has a particular definition of a “claim” for which the latter type of written notice is required.Under the SCA’s definition, certain “contingent” or “unmatured” claims are excluded.However, you also may choose to give notice to people or companies with these other types of claims.
Furthermore, you may also 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 three 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.
Articles of Termination
After you have finished winding up your corporation, you must file articles of termination with the SOC to officially end your corporation’s existence.The articles of termination must contain:
- ·the name of your corporation
- ·a statement that all the assets of the corporation have been distributed to its creditors and shareholders; and
- ·a statement that the dissolution of the corporation has not been revoked.
Along with the statement of termination you must also file a statement certifying that your corporation has filed returns and has paid all state taxes up to the time of the statement.(In order to obtain and include this certificate, your corporation may file returns and pay taxes before they would otherwise be due.)
There is a $10 fee to file the articles of termination.An articles of termination form, including instructions, is available for download from the SOC.Depending on your specific situation, you may find it makes most sense to file the articles of dissolution and articles of termination at the same time.It usually takes the SOC one to two weeks to process articles of dissolution and articles of termination.Expedited service is available for an additional fee.
Be aware that your business name will become available for use by others after your filings are processed and the SOC issues its certificate of termination.
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.
Virginia does not require that you obtain tax clearance before dissolving your corporation.However, as noted above, you must attach a certification regarding payment of taxes to your articles 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).
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 SOC 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.
Closing your Virginia corporation will involve a variety of tasks.Among the most important are what is known as dissolving and winding up the business.