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 Maryland 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 Maryland. 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 stockholders. Also, while there are streamlined procedures for dissolving corporations that have not yet issued stock, those procedures are not covered in this article.
The general rules for voluntary dissolution are found in Maryland's General Corporation Law ("GCL"). The GCL contains two methods for voluntary dissolution:
Under the first method, a majority of the board of directors must adopt a resolution advising stockholders that the corporation should be dissolved. A stockholder meeting is then scheduled to vote on the resolution. You are required to give at least 10 days advance notice of the meeting to each stockholder entitled to vote on the dissolution. At the meeting, the proposal to dissolve must be approved by at least two-thirds of all stockholder votes entitled to be cast on the matter.
The second method allows you to avoid a vote at a formal meeting if all stockholders provide their written consent to dissolve. This method can be more efficient for small businesses where most or all of the stockholders are directors—and there is full agreement on dissolution. All stockholders must sign in writing or electronically 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 additional rules, not covered here, for acting based on the written consent of less than all stockholders—you should consult with a business attorney for more details.)
After at least two-thirds of the voting shares have approved the dissolution, you must file articles of dissolution with the Maryland State Department of Assessments and Taxation ("SDAT"). However, if your corporation has known creditors, you must mail notice of the approved dissolution to those creditors at least 20 days before filing your articles of dissolution. Notices should be sent to the creditors' addresses as shown in your corporate records.
Apart from giving 20 days' advance notice to creditors, before filing articles of dissolution with the SDAT you must file any required personal property tax reports with the SDAT. There are more specific rules regarding these reports which depend on the date you file your articles of dissolution, as follows:
Filing articles of dissolution between January 1 and April 15
You do not need to file the tax reports for the current year if either (a) you include a notarized affidavit with your articles that your corporation owned no tangible personal property on January 1 of the current year, or (b) the corporation's tangible personal property is transferred prior to dissolution and a transfer of property report is filed with the articles of dissolution. (A transfer of personal property form is available by calling the SDAT.)
Filing articles of dissolution between April 16 and June 30
You must file a personal property report for the current year. However, you will not have to pay personal property taxes for the current year if either (a) the report indicates that the corporation owned no personal property on January 1 of the current year, or (b) the corporation's tangible personal property is transferred prior to dissolution and a transfer of property report is filed with the articles of dissolution. (A transfer of personal property form is available by calling the SDAT.)
The articles of dissolution must contain multiple pieces of information about your dissolved corporation, including:
The articles must be signed by an authorized individual. (This generally means a president, vice president, chairman, chief executive officer, chief operating officer, or chief financial officer, unless your bylaws or a resolution of the board of directors allows for another individual to sign.) The signature also must be witnessed and attested to by an authorized individual. (This generally means the corporation's secretary, treasurer, chief financial officer, assistant treasurer, or assistant secretary, unless your bylaws or a resolution of the board of directors allows for another individual to witness and attest.)
There is a $100 fee to file the articles of dissolution. Regular processing time is 7-8 weeks. You can request expedited processing (within 7 business days) for an additional fee. Hand-delivered documents also receive expedited processing but also require an additional fee. Apart from mail and hand-delivery, you may submit by fax, but you will be charged the expedited processing fee. An articles of dissolution form including detailed instructions is available for download from the SDAT website.
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 for the board of directors to designate one or more officers and/or directors to handle the winding up.
Under the GCL, key winding up tasks include:
Regarding the last two listed items, be aware that your corporation's first obligation is to discharge debts and obligations. This includes paying all business taxes and creditors. Only then may the corporation distribute remaining assets to stockholders.
Also, with regard to distribution of remaining assets to stockholders, be aware that there are special rules regarding providing notice to stockholders stating that they must prove their interests in the corporation's assets within a certain timeframe. While these rules may not be relevant to closely-held corporations where the directors are also the only stockholders, in other circumstances it may take as long as three years before surplus assets can be distributed. If you have multiple stockholders who may have interests in surplus assets, you should contact an attorney for guidance.
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.
Maryland does not require that you obtain tax clearance before dissolving your corporation.
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 SDAT 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.