How to Close a Company: 5 Ways a Company Can End and Who Controls Each

A company can end in five ways, and its owners control fewer of them than the incorporation papers suggest. Two begin with the owners and finish with someone else holding the assets; one is decided by a state tax agency that has stopped waiting for a return; one belongs, in large part, to a buyer.

How to close a company is therefore a question about control before it becomes a question about forms. For each route below, the article sets out who may start it, who holds the property once it starts, and who is paid from that property, in what order.

1. Voluntary Dissolution Keeps the Owners in the Chair Longest

The owners decide. New York's Business Corporation Law section 1001 authorizes dissolution by a vote of a majority of all outstanding shares entitled to vote for newer corporations, and two thirds for older ones whose certificates were never amended. Delaware's section 275 asks for a board resolution followed by approval from a majority of the outstanding stock, or the written consent of every stockholder entitled to vote. A New York LLC dissolves under LLC Law section 701 on the vote or written consent of at least a majority in interest of its members, unless the operating agreement sets a higher bar.

The filing is where the state reenters. New York will not accept a corporation's certificate of dissolution without the Tax Department's consent attached, and Delaware will not dissolve a corporation until its franchise taxes and reports are current.

After filing, the owners run the winding up themselves, or, more precisely, they keep the duty that comes with running it. A dissolved New York corporation may carry on no business except winding up its affairs. Delaware's section 281 requires claims to be paid or provided for before anything reaches stockholders, and section 282 limits a stockholder's exposure to the lesser of a pro rata share of the claim or the amount distributed to that stockholder. Creditors come first; owners take what is left.

2. Letting the Charter Lapse Hands the Decision to a Tax Agency

The route most owners actually take is the one nobody chooses. The returns stop, the franchise tax goes unpaid, and the state eventually acts on its own.

Two years is the New York figure. Under Tax Law section 203-a, a corporation that has not filed its franchise tax reports for two consecutive years, or that has been delinquent in paying the tax for any two years, may be dissolved by proclamation of the Secretary of State. California's Franchise Tax Board suspends entities that fail to meet their tax requirements, and a suspended entity must go through the revivor process, filing the delinquent returns and paying the balances, before California will allow it to dissolve at all.

A company dissolved this way resembles a boat abandoned at a municipal marina: the harbor master eventually tows it, and the invoice for the towing is still addressed to the owner. Nothing owed has gone away. New York preserves, after dissolution, every remedy that existed against the company and the people who ran it, and the IRS will not close a business account until every required return is filed and every tax paid. Reversing a proclamation requires a certificate of consent from the Commissioner of Taxation and Finance, given only after all taxes, penalties and interest have been paid.

So the lapse (which owners who choose it tend to describe as the free option, the one that costs no filing fee and no lawyer) forfeits the one advantage an orderly dissolution offers, the chance to set a deadline for creditors under a notice statute, and replaces it with penalties that accumulate while the owners are occupied elsewhere. Whether a creditor who was never told about the proclamation regards the company as closed is a question the proclamation itself does not address.

3. A Sale Transfers the Assets and Only Sometimes the Debts

Here the buyer holds most of the control, because the buyer decides what it is willing to take. An asset purchase ordinarily leaves the seller's debts with the seller. In Schumacher v. Richards Shear Co., New York's Court of Appeals recognized four routes to a buyer's liability for its predecessor's torts: an express or implied assumption, a consolidation or merger, a buyer that is a mere continuation of the seller, and a transaction entered into fraudulently to escape obligations.

Statutes add their own exceptions. A buyer of a New York sales tax vendor's business assets must notify the Tax Department at least ten days before taking possession or paying; a buyer who does not can become personally liable for the seller's sales tax, up to the purchase price or fair market value of the assets. Liens travel with the collateral as well, since UCC 9-315 generally continues a security interest after disposition unless the secured party authorized a sale free of it.

The purchase price goes to the selling company. The company pays its creditors from it and then dissolves by one of the other routes.

4. An Assignment for the Benefit of Creditors Ends Owner Control at Signing

The company's managers sign the assignment; from then on, a fiduciary controls the property. Florida's chapter 727 is a detailed example. The assignment must be irrevocable and in writing, with schedules of creditors and assets; the assignee records it, petitions the circuit court, and posts a bond of at least $25,000 or double the liquid unencumbered assets, whichever is higher. The assignee must liquidate "with reasonable dispatch," may run the business for no more than 45 days without an extension, and pays in a fixed order: secured creditors from their collateral, then administrative costs, then certain taxes, wages and consumer deposits, then everyone else. Anything left returns to the company.

New York has its own general assignment statute in Debtor and Creditor Law article 2. Florida's statute discharges the assignee, not the company's debts, and nothing in it protects an owner who guaranteed them.

5. Chapter 7 Replaces the Owners With a Trustee

The board authorizes the petition under state law, and a lawyer must file it, because an entity appears in federal court only through counsel. Creditors can also start the case, since under 11 U.S.C. 303(b), three or more holding undisputed, noncontingent claims totaling at least $21,050 above their liens may file an involuntary petition, and a single qualifying creditor may do so when there are fewer than twelve. Promptly after the order for relief, the United States Trustee appoints an interim trustee, who collects and reduces the property to money and pays claims in the order section 726 sets. The company receives no discharge.

The owners, from that day, answer questions rather than ask them.

Choosing Among the Five

The first and third routes leave room for negotiation, and that is where Delancey Street works: it negotiates the advance balances that so often carry an owner's guaranty, beginning with a confidential review for which it charges nothing. The firm, which is not a law firm, administers no assignments or bankruptcy estates and sends legal questions to outside lawyers who hold their own licenses. A company with many creditors and nothing to divide may belong in chapter 7 or an assignment from the start, and counsel should say so.

Every route distributes the same property. They differ in who holds the pen while it is divided, and an owner who waits long enough discovers that the choice among them has been made by someone with less interest in the outcome.