By Attorney Edward Jesson
Whether good or bad, it is sometimes necessary to dissolve a corporation or limited liability company (“LLC”). If the business has no assets or liabilities, then closing down is relatively simple. However, business owners can get into trouble when they attempt to close down their businesses if it has remaining assets and liabilities. It is recommended that they work with an attorney. There are some subtle differences between dissolving an LLC and a corporation, but we are just going to use a corporation as an example below.
The first step in voluntarily closing a business in North Carolina is to file the articles of dissolution with the Secretary of State. Once the articles of dissolution are filed, the corporation still must adhere to its bylaws with regards to its directors and shareholders. However, the corporation is no longer allowed to carry on its normal business and must only do things in furtherance of winding up its affairs and liquidating. The North Carolina Business Corporation Act specifically states that a business may:
The next step in the process is liquidation. During this process, the owners of the business are responsible for selling assets and for settling the corporation’s debts. In the North Carolina Business Corporations Act, there are notice and publication procedures that a corporation can use to give notice of its dissolution or liquidation to creditors or potential creditors. While the Act does not impose any legal requirement to do so, it is beneficial for businesses to follow this procedure because it starts a clock and establishes deadlines within which creditors must bring claims.
The potential claims against a corporation fall into two main camps: known claims and unknown claims. If a corporation sends written notice of its dissolution to known creditors, it can establish a claims due date of 120 days from the date of the notice. If the claim is not made by that deadline, the claim will be considered time barred. For unknown claims, a corporation must publish, among other things, notice of its dissolution in a newspaper in the county where the dissolved corporation has its principal office. This will start a five-year clock for unknown claims.
Generally, when liquidating a corporation, all assets of the corporation will be distributed to any creditors first and then to the shareholders. If the assets are not properly distributed (e.g. if a shareholder received assets instead of a creditor), then the aggrieved creditor could potentially file a lawsuit against the shareholder and against the directors who authorized the distribution.
As you can see, closing down a business can be a minefield for all involved. The attorneys at Jesson & Rains can help you close down your corporation or LLC properly or help you figure out alternatives to closing down your business.
In North Carolina, generally, the answer to this question depends on (1) what type of business you own; (2) whether you have bylaws or an operating agreement; (3) whether you have a will; and (4) if you have an insolvent estate.
No matter what type of business, your interest in the business is an asset. Unless there’s a contract stating otherwise, it is an inheritable asset, meaning if you have a will, you can name who the interest passes down to, or if you do not have a will, the interest will pass to your heirs (spouse, children, etc.). If you want to pass your business interest to your son, who will run the family business, instead of it passing naturally to your spouse, you need to have a will drafted.
When the individual and the business entity are interwoven, like a sole proprietorship or a partnership, it is important to note that business debts are oftentimes personal and can cause your estate to be insolvent (leaving nothing for your family). This is an important reason to form a business entity separate from the individual. If your business is not healthy, it may cease to operate at your death and wipe out your estate.
If you have a contract with other members of the business, you can state what happens to your interest when you pass. This is one of the reasons why we urge people who are going into business with non-relatives to enter into operating agreements – do you really want to be working with your business owner’s spouse after the pass away? More importantly, what happens if the spouse has no interest in running the business? What if she wants to sell or have you buy her out? What if you cannot afford to do so? In addition to recommending our clients enter into operating agreements, we recommend that they incorporate buy/sell language into these agreements. Financial professionals can find inexpensive ways to fund these agreements so that a partner can afford to buy another out.
If you own stock in a corporation, that stock will be passed to your beneficiary or heirs just like any other property. While this is not a big deal if you own stock in AT&T, for example, it is a big deal if you own 90% of the shares of a small, family owned business. Again, maybe your business partner does not want to own the corporation with your spouse.
If it is your wishes to continue your business when you pass, and your family is onboard, it may be a good idea to put your business interest in the name of a revocable trust. This way, your business interest stays out of your estate when you pass away and the trustee can manage your business interests better than the executor can. Many attorneys will recommend to executors to liquidate business assets because there is too much potential for liability on the executor’s part if he/she attempts to continue to operate the business.
We recommend that all individuals get an estate plan in place. However, as you can see, there is more planning to be considered when that individual is a business owner. Feel free to contact Jesson & Rains if you have questions about your business or estate plan.
Did you know you could be held personally responsible for your corporation’s debts if the corporation is dissolved improperly?
The first step in closing your corporation is called “dissolution.” Once a corporation has filed for dissolution, it is no longer able to carry on business, except for business that is necessary to wind up the corporation’s affairs (for example collecting assets owed to the corporation and disposing of any corporate property).
One of the most important steps involved in dissolving a corporation, and the one that can get the shareholders in trouble, personally, is that of disposing of claims against the corporation (in other words, money owed by the corporation). The dissolving corporation must notify known claimants, in writing, that: it is dissolving; describe any information required by the corporation to process a claim; provide a mailing address where the claim can be sent; state a deadline (which must be no fewer than 120 days from the date of the written notice) by which the corporation must receive the claim; and state that the claim will be barred if not received by the deadline. For unknown claims, the corporation can publish this notice in a newspaper in the county in which the corporation had its principal office.
If the procedure is not followed, then the shareholders of the corporation could be held personally liable, up to the individual shareholder’s pro rata amount of the claim or up to the amount of the corporate assets distributed to that shareholder.
For example, XYZ, Inc. is a corporation with two shareholders that wishes to dissolve. XYZ, Inc. has $1 Million in assets which are distributed to each shareholder evenly. At the time of XYZ, Inc.’s dissolution, there was a known claimant who had a claim against XYZ, Inc. in the amount of $800,000.00. If XYZ, Inc. properly notifies the claimant of XYZ, Inc.’s dissolution, and the claimant fails to make a claim within the deadline, the claim will be barred, and the shareholders can split the remaining assets.
However, had XYZ, Inc. not followed the correct notification procedures, the claimant could recover $400,000.00 from each of the shareholders. This is bad news for the shareholders if they have already spent or invested the $400,000 they received when the corporation closed.
As you can see, liability issues do not only occur during the initial startup phase or during the day to day business operations of the corporation. Even once your corporation has been dissolved, claimants can come back at a later date and claim money from a corporation’s shareholders.
The attorneys at Jesson & Rains, LLP can help you avoid many corporate pitfalls and are able to offer assistance and counselling in all stages of your corporation’s life.
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Kelly Rains Jesson