Closing A Business: What is Involved?

By Attorney Edward Jesson
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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:

• Collect its assets;
• Dispose of property not to be distributed to shareholders;
• Discharge its liabilities;
• Distribute the remaining property to shareholders; and,
• Do any other act necessary to wind up and liquidate.

Any act further than those necessary to wind up and liquidate may invalidate the dissolution, which could have potential liability ramifications at a later date.

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.
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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.