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 Washington 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 Washington. 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 involuntarily terminated for failing to file an annual report or pay fees, 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.
Washington’s Business Corporation Act (“BCA”) provides for voluntary dissolution through a shareholder vote at a shareholder meeting. Before the meeting, your board of directors must submit a proposal to dissolve to the shareholders. You are required to give at least 20 days advance notice to each shareholder, whether or not entitled to vote, of the meeting. Unless your articles of incorporation or board of directors requires a different margin, a two-thirds majority of all votes entitled to be cast must approve the dissolution. (If there are separate voting groups, a two-thirds majority of the votes in each group must approve the dissolution.) You should also make sure to properly record both the board’s proposal and the shareholders’ votes.
The BCA also allows you to avoid a formal shareholder vote at a meeting if shareholders entitled to vote on dissolution provide their written consent. There are three ways written consent can operate to approve a dissolution. First, 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 only the two-thirds majority of shares otherwise required under the BCA when shareholders vote at a shareholder meeting. Third, dissolution may be approved by the consent of any other majority of shares authorized in 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. There are also requirements for giving notice to nonconsenting voting shareholders and nonvoting shareholders both before and after the requisite number of consents have been received by the corporation. (For more information about giving proper notice, you should consider consulting with a business lawyer.) 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.
The State of Washington requires corporations to obtain tax clearance before it will allow dissolution. You must file a Revenue Clearance Certificate Application with the Department of Revenue (“DOR”). The application, including instructions, is available for download from the DOR website as a fillable PDF form. Be aware that it could take as long as one month for the DOR to process your application. If your corporation is current with its franchise taxes, the DOR will respond to your application by sending you a Revenue Clearance Certificate. You must attach the certificate to your articles of dissolution (see below).
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 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” 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 approved; and
- a statement that dissolution was duly approved by the board of directors and approved by the shareholders in accordance with the relevant section of the BCA (namely, RCW 23B.14.020).
An articles of dissolution form is available for download from the SOS website. If you use the SOS form—which is recommended—you must also provide the Unified Business Identifier (UBI Number) issued by the SOS for your corporation. The form must be signed by an officer or chairman of the board of the corporation.
Remember: You must obtain a tax clearance certificate from the DOR and attach it to your articles of dissolution.
There is no fee to file the articles. Your filing can take as long as a month to process. You can receive expedited processing (one week) for a $50 fee.
Be aware 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 be applied toward satisfaction or making reasonable provision for satisfaction of corporation liabilities or will otherwise not be distributed in kind to its shareholders
- satisfying or making reasonable provision for satisfying corporation liabilities, in accordance with their priorities as established by law; 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
Within 30 days of the effective date of your articles of dissolution, you must publish a notice of the dissolution. The notice must include a request that persons with claims against the dissolved corporation present those claims in accordance with the notice. The notice must be published once a week for three consecutive weeks in a newspaper of general circulation in the county where your corporation’s principal office is located. (If there is no principal office, you should use the location of your corporation’s registered office.)
The notice must:
- describe information that must be included in a claim
- provide a mailing address where a claim may be sent; and
- state that claims against the dissolved corporation may be barred in accordance with the provisions of BCA if not timely asserted.
In addition, you may also send written notice directly to persons known to have claims against the corporation. While giving this type notice is optional, doing so will help limit your liability and also allow you to more safely make final distributions to shareholders. This type of notice must:
- provide a mailing address where a notice of claim may be sent
- state the deadline, which may not be fewer than 120 days from the effective date of the written notice of dissolution, by which a written notice of claim must be delivered to the dissolved corporation
- state that the known claim will be barred if a written notice of claim describing the known claim with reasonable particularity is not delivered to the dissolved corporation by the deadline; and
- state that the known claim or any executory contract on which the known claim is based may be rejected by the dissolved corporation, in which case the holder of the known claim will have a limited period of 90 days from the effective date of the rejection notice in which to commence a proceeding to enforce the known claim.
There is also further information this type of notice must contain which varies depending on the details of the claim involved.
Some of the rules for giving notice and responding to claims are complicated and can be hard to understand. Therefore, when dealing with giving notice to people who may have claims against your corporation, 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.
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.