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Proceeding When a Business Fails

written by: •edited by: Jean Scheid•updated: 8/13/2011

It is not an easy decision to close a business. There are required steps that must be adhered to when doing so. When dissolving a corporation, the parties involved are required to file specific documents with the state and with the Internal Revenue Service. All debts must be satisfied as well.

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    Corporate Structure Restrictions

    Corporation Each type of company requires specific steps in order to complete the process of dissolution. When considering dissolving a corporation, the first thing that should be reviewed is the articles of incorporation to determine if there were requirements that were included. Depending on whether a company was formed as a C-Corporation, an S-Corporation, a Limited Liability Company (LLC) or a Partnership, the parties who must agree will vary depending on the corporate structure.

    C-Corporation - the articles of incorporation will typically state who has the right to make decisions for the corporation. If the company is publicly held, there may be special rules that have to be adhered to by the Securities and Exchange Commission.

    S-Corporation - an S-Corporation is generally a sole proprietorship although this structure may be elected by multiple persons who have a leadership position. In the event of a sole proprietorship, the owner has the final say. If there is more than one owner, the authorization of all owners must be obtained prior to business operations stopping.

    Partnership - generally speaking most partnership documents will explain the conditions under which the partnership may be dissolved. Typically, all general partners must agree to stop all business operations. If partners cannot agree there could be legal action to force action.

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    What Action Plan is Required

    Checklist A corporation will be deemed dissolved if the following plan of action is completed:

    • The directors of the corporation must formally propose dissolution at the board meeting and it should be recorded in the official minutes of the corporation.
    • It is necessary that the proposed dissolution is further approved by a majority of shareholders provided that there are not conflicting statements in the formation of the corporation.
    • The corporation has to file IRS Form 966 within 30 days after the resolution to dissolve the corporation is adopted. Many states require tax clearance certificates, which means corporations must obtain a certificate or statement from the concerned state authority declaring that the corporation is not in arrears on its state tax liability. The IRS provides a checklist for a corporate dissolution.
    • The corporation must file its final tax return within 6 month of the close of the corporation.
    • A business is required to have all licenses and permits legally held by the corporation suspended.
    • Creditors must be informed of the intention to dissolve the corporation. Claims of creditors should be settled with the individual debtor. For this purpose, the creditors must be issued a notice along with contact address to which the creditor may send his or her claim and the deadline for submitting such claims. Payment should be made when a claim is filed. If a claim is rejected, the corporation is obliged to advise each creditor of the rejection in writing and the reason for the rejection.
    • The remaining assets of the corporation are dispersed proportionately among all shareholders.
    • Once all formalities are completed, the corporation is obliged to file Articles of Dissolution.

    Dissolving a corporation may require the corporation seek legal guidance. There are many potential liabilities that could potentially face the company's board of directors members if all requirements are not met. It is important that all liabilities to shareholders, vendors and employees be met when dissolving a business.


  • Corporation: Author Verena Köster via Public Domain
  • Checklist: Author Jvascoe via Public Domain
  • Nolo Law for All Bethany K. Laurence, J.D., Shannon Miehe, Attorney; Closing Your Business: What You Need to Do

    Image Credits:

  • Internal Revenue Service: Closing a Business Checklist,,id=98703,00.html
  • Small Business Administration: Steps to Closing a Business