How to Dissolve a Business: 6 Differences Between Dissolution, Winding Up, and Termination

There are three stages when you close a company: dissolution, winding up, and termination. First comes dissolution, which is the vote and filing to end the company. After that comes winding up, where you pay the debts, notify the creditors, sell the assets, and distribute the leftovers. Finally, when the state finishes with you, there is termination, which is when the business legally stops existing.

Businesses close for all kinds of reasons: lack of money, partner fallouts, badly-managed finances, and more. Whatever the cause, it’s important to know where the leftover money and property go, and how to walk through the process with all of your obligations met.

Difference Between Dissolution and Winding Up

The first difference between dissolution and winding up is who acts. When a company dissolves, its board of directors drafts a resolution, and the shareholders vote on it. The amount needed to pass the vote is decided by the company’s articles, its bylaws, and by state law. Once the proposal has gone through and the vote has passed, state law requires you to fill out articles of dissolution and file them with a state office like a secretary of state.

The rules for voting on dissolution vary by state. Delaware requires the majority of the whole board and the majority of outstanding voting stock. In South Carolina and Texas, it has to be two-thirds of the voting shareholders, unless the company’s articles of incorporation say otherwise.

Partnerships are governed by a partnership agreement. If they didn’t make one, then they follow state law. Most states follow the Uniform Partnership Act, which gives you the right to dissolve the business when a partner leaves, or is forced out, or dies. It can also dissolve because of bankruptcy or by a court order.

The second difference between dissolution and winding up is status. Once you’ve dissolved the company, it still exists but only for the purpose of winding up and termination. It is not supposed to go on doing business with creditors and clients as before. In states like Delaware, the company keeps existing for at least three years just to handle any lingering claims or duties. There, a suit filed before the company dissolves, or during the three-year wind-up period afterward, does not go away. The company keeps existing for that lawsuit until the judgment is fully carried out.

The third difference is that winding up is when creditors are told to put in their claims. Send certified letters or do this through a public ad asking them for their claims. Look in your state’s laws to find the window where they can submit these to you. In Delaware, you can put a deadline for claims no earlier than 60 days after your notice, and rejected claimants have 120 days to sue or their claims are barred.

Even if it is not required, it’s a good idea to send a certified letter to each known creditor. Then, if they come after you later, you will have records showing you were thorough in settling the company’s business. Some states may require a newspaper notice if there are unknown creditors.

The fourth difference is money. When you wind up a company, you sell off the assets, like vehicles, equipment, furniture, and inventory, and give the proceeds to creditors, until the debts are paid in full. Then, whatever is left goes to the owners according to their ownership share.

When you close up an LLC, the creditors are typically paid, then the owners get back their contributions. Then, leftover assets are split by ownership percentage. Delaware is one state that requires LLCs to put aside reserves for claims likely to come within 10 years.

If money runs short when the time comes to wind up and pay creditors, you may be able to settle for less than full payment. But do remember that your shareholders and LLC members generally are not personally liable to creditors, with a few exceptions. Partners and sole proprietors are personally responsible for the debts, though. And in Chapter 7 bankruptcy, a corporation or LLC cannot get a discharge.

The fifth difference is taxes. Corporations file IRS Form 966 within 30 days after they pass a resolution to dissolve. In states like New York and Texas, you can’t even file your articles of dissolution before you pay any taxes still owed. Partnerships need to file Form 1065 for the final year. Sole proprietors need to add Schedule C. The IRS won’t close the EIN account until all the returns are filed and all the taxes paid, including the final Form 941 or 944 for employers.

The sixth difference is that you file a final document after you have settled the claims, paid the creditors, and paid out the final distributions. In Delaware, for example, the LLC is still around to handle winding up tasks until it files a certificate of cancellation, which ends its existence. Some California LLCs go through just one filing to wind down, some have to go through two. LLCs that dissolve with a unanimous vote can cancel themselves out with a single certificate of cancellation. If not unanimous, it is a certificate of dissolution and then a certificate of cancellation.

Close a Business

You are supposed to dissolve any LLC or corporation in every state where it was registered. If you fail to dissolve your company in a state, you may still owe taxes and have to keep filing reports. Make sure to close the bank accounts, cancel any licenses, permits, or subscriptions, and ask your insurer whether there is any extended liability coverage that applies.

When a general partnership ends, it usually does not need to file anything. For a limited partnership or limited liability partnership, many states require you to file a certificate of cancellation or withdrawal. A sole proprietor gets a “doing business as” name, aka DBA, cancelled from the county where it filed the DBA, or each county if it filed in several.

It is wise to check your state’s extra requirements. For help filing tax forms, get yourself a tax attorney or CPA.