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 Tennessee 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 Tennessee. 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, 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 not yet started doing business, those procedures are not covered in this article.
Tennessee’s Business Corporation Act (“BCA”) provides for voluntary dissolution through either of two methods:
Under the first method, your board of directors submits a proposal to dissolve to the shareholders. The shareholders then must vote on the proposal at a shareholder meeting. You are required to give at least ten days advance notice of the meeting to each shareholder regardless of whether the shareholder is entitled to vote on the proposal. Then, unless your corporation’s charter or board of directors requires a greater vote or a vote by voting groups, approval of the dissolution requires a majority of all votes entitled to be cast on the proposal. Make sure to properly record both the board’s resolution and the shareholders’ votes.
The BCA also allows you to avoid a shareholder vote at a formal meeting if all shareholders entitled to vote provide their written consent. In addition, your corporation’s charter may provide that you can dissolve by getting the written consent of the same number of shares as would otherwise be needed to vote for dissolution at a meeting. In the latter case, unless your charter or the board of directors requires a greater vote, to dissolve you would need to get written consent from a majority of shares. In either case—consent from all voting shares or only a certain majority of shares—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 records. 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. If you use this method, you must give any nonvoting shareholders ten days advance notice before completing the written consent. In addition, if the written consent is not by unanimous vote, you must give notice of the completion of the written consent to all non-consenting shareholders no more than ten days after the consent is recorded with the corporation.
Note that dissolution, alone, does not:
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” file the articles. However, filing articles of dissolution is generally the best practice. (If you have specific questions about whether to file, you should contact a local attorney.)
To complete the articles of dissolution, you must provide:
You also need to include either a copy of the written consent to dissolve or the resolution authorizing dissolution. There is a $20 filing fee. An articles of dissolution form (Form SS-4410) and a unanimous written consent form (Form SS-4255) are available for download from the SOS 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 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 after dissolution. Proper written notice must:
You also may 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 two 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.
After completing the winding up of your corporation, you must file articles of termination with the SOS. (In some cases, where very little is needed to wind up, a corporation may end up filing the articles of dissolution and articles of termination at the same time.) The articles of termination must include:
You should also include a shareholders’ written consent to termination. There is a $20 filing fee. An articles of termination form (Form SS-4412) and a unanimous written consent form (Form SS-4256) are available for download from the SOS website. Filings are usually processed in three to five business days. If you deliver the filing in person, it may be processed while you wait.
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.
Tennessee does not require that you obtain tax clearance before dissolving and terminating your corporation. However, the SOS Division of Business Services will request verification from the Department of Revenue (“DOR”) that your corporation has filed all reports and paid all taxes and penalties. If the DOR cannot provide tax clearance verification, your articles of termination will be rejected.
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.