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 Michigan 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 Michigan. 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 for administrative reasons such as failing to file an annual report or pay a required filing fee, 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 or started doing business, those procedures are not covered in this article.
Michigan’s Business Corporation Act (“BCA”) provides two main methods for voluntary dissolution:
Under the first method, the board must submit a proposal to dissolve to the shareholders. The proposal must be submitted to the shareholders at a shareholder meeting. The corporation must provide at least ten days advance notice to each shareholder, whether or not entitled to vote, of the proposed shareholder meeting on dissolution. At the shareholder meeting, a majority of shareholders must approve of the dissolution. (Additional voting rules may apply if there are multiple classes of voting shareholders.) Note: Unless your articles of incorporation state otherwise, a formal shareholder meeting is not necessary if a majority of the voting shares sign a special document—a consent resolution—authorizing the dissolution. If you choose to use a consent resolution, shareholders who do not sign must be given prompt notice regarding the action to dissolve. Use of a consent resolution is often more efficient for small, closely-held corporations where all or most of the shareholders are also corporation directors.
The second BCA method applies if there is a shareholder agreement. The agreement must contain either (a) a provision requiring dissolution at the request of one or more shareholders, or (b) a provision requiring dissolution upon the occurrence of a specific event. (Shareholder agreements requiring dissolution at the request of one or more shareholders must comply with certain formal requirements for shareholder agreements under the BCA.)
Among other things, dissolution alone:
After dissolving your corporation, you must file a certificate of dissolution with the Department of Licensing and Regulatory Affairs (“LARA”). (This department, formerly known as the Department of Labor and Economic Growth (“DLEG”), was recently renamed, and some downloadable forms still refer to DLEG rather than LARA). Under the BCA, the certificate of dissolution must at least contain:
In addition, if you are using LARA’s certificate of dissolution form, which is downloadable from the LARA website, you’ll also be asked to indicate which among multiple procedures was used to dissolve your corporation. For example, you can check a box indicating that dissolution was approved at a shareholder meeting (with blanks for the date and time of the meeting). As a rule, you should use the LARA form to help assure that your certificate of dissolution is not rejected.
There is a $10 fee to file the certificate. Processing times can vary. There are various forms of expedited processing—24 hours, same day, two hours, one hour—that are available for substantial additional fees.
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:
One other final part of winding up is distributing remaining assets to shareholders. The BCA is very clear that final distributions to shareholders are permitted only after your corporation has made “adequate provision” for its debts, liabilities, and other obligations. This includes paying all business taxes and creditors. It can also include specific procedures for setting aside funds to pay people with claims against your company.
One other key task following dissolution, and one further potential elements of making “adequate provision” for your corporation’s obligations, is giving notice of the dissolution to creditors and other claimants. 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 after dissolution directly to parties with existing claims. (Existing claims are current claims or rights against your corporation, and do not include contingent claims or claims based on events occurring after the effective date of dissolution.) Proper written notice must include:
You also may give general notice to 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 one year 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.
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.
Michigan does not require that you obtain tax clearance before dissolving your corporation. However, Michigan does require that you submit a tax clearance request to the Department of Treasury (“DOT”) within 60 days of filing your certificate of dissolution. A form for the request is available online from the DOT. If you do not receive a tax clearance certificate from the DOT before filing for dissolution, you probably will need to file an affidavit with the certificate of dissolution affirming that that all state debts and obligations will be satisfied. For more information, consult with a business attorney.
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.
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.