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 Illinois corporation, you’ll need to take care of multiple tasks—including what is called dissolving and winding up your business.
Your corporation is registered with the State of Illinois. 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, or for administrative reasons such as failing to file an annual report or pay franchise taxes, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are special procedures for dissolving corporations that have not yet issued shares, returned any payments made for shares, and have no unpaid debts, those procedures are not covered in this article.
Illinois’s Business Corporation Act (“BCA”) provides for voluntary dissolution through the unanimous written consent of all shareholders entitled to vote on dissolution. No vote or action by the board of directors is required for dissolution through unanimous written consent. The 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. For small businesses where most or all of the voting shareholders are directors, and there is unanimous agreement on dissolution, written consent is generally the most efficient way to approve dissolution.
The BCA also 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. (There is also a provision in the BCA allowing for a certain minimum proportion of shareholders to first propose dissolution to the board of directors; if you think this might be relevant in your case, you should contact a business attorney for further guidance.) You are required to give ten days advance notice to each shareholder, whether or not entitled to vote, of the proposed meeting to consider dissolution. Unless your articles of incorporation provide for a different required majority, a two-thirds majority of all votes entitled to be cast must approve the dissolution. (If there are voting classes, each class must approve dissolution by a two-thirds majority or the majority provided for in your articles of incorporation.) If you use this method, make sure to properly record both the board’s proposal and the shareholders’ votes.
Note that dissolution, alone, does not:
After dissolving your corporation, you must file articles of dissolution with Secretary of State (“SOS”). To complete the articles of dissolution, you must provide:
An articles of dissolution form (Form BCA 12.20) is available for download from the SOS website. You must submit two copies of the articles. There is a $5 fee to file the articles. Your filing usually will be processed in 7-10 days. Expedited processing is available for an additional fee.
Note 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:
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.
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 within 60 days of the effective date of dissolution. Proper written notice must state:
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.
Illinois does not require that you obtain tax clearance before filing to dissolve your corporation. However, the SOS will not accept your articles of dissolution unless all applicable franchise taxes, fees, and interest have been paid.
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 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.