Closing Your Corporation – Cautionary Tale

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.
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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.