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The U.S. Bureau of Labor Statistics reports that about 20% of new businesses close within their first two years, 45% within five years, and 65% within ten years. Only 25% of new businesses survive for 15 years or more.
These statistics show that not all businesses achieve long-term success. Hence, if your Delaware corporation has reached a point where continuing operations is no longer viable, it may be time to dissolve the business.
Closing a corporation involves more than simply ceasing operations; you must take deliberate steps to meet legal and financial obligations. While corporations can be dissolved involuntarily through administrative action or legal proceedings, this article focuses on the voluntary dissolution initiated by shareholders.
Keep reading to discover how to close a Delaware corporation.
#1 Dissolve the Corporation with the Board of Directors
To properly dissolve a Delaware corporation, the Board of Directors must initiate and approve the decision. This process ensures the dissolution is handled per corporate governance principles and complies with legal requirements.
Here’s a step-by-step guide for proposing dissolution and documenting the decision:
Assess the Need for Dissolution
This assessment should include reviewing the corporation’s current financial condition, business operations, and any potential liabilities. Consult legal and financial advisors to understand the implications of dissolution.
Prepare a Proposal for Dissolution
Once the need for dissolution is established, the next step is to prepare a formal proposal.
This proposal should outline the reasons for dissolution, the anticipated impact on shareholders and employees, and any necessary steps to wind down operations. It should also address the management of outstanding debts and obligations.
Schedule a Board Meeting
A meeting of the Board of Directors must be scheduled to discuss the proposed dissolution. Provide all board members with a notice of the meeting, including the date, time, and agenda. This ensures all directors have the opportunity to participate in the discussion and decision-making process.
Present the Proposal
During the board meeting, the proposal for dissolution should be presented clearly and concisely. Directors should have the opportunity to ask questions and discuss the implications of the decision. This open discussion is important for making the right decision.
Requirements for Board Approval
Formal Vote
Following the discussion, a formal vote must be conducted to approve the dissolution. The corporation’s bylaws will specify the required majority for approval. It is important to adhere to these bylaws to ensure the dissolution is valid and legally binding.
Drafting of Resolutions
Once the vote is complete and dissolution is approved, a resolution must be drafted. This resolution should include:
- The decision to dissolve the corporation.
- The effective date of the dissolution.
- Additional instructions for winding down operations and settling obligations. This resolution serves as a formal record of the board’s decision and should be signed by the board members.
Documenting the Decision
Document the board meeting and the decision to dissolve the corporation in the meeting minutes. The minutes should include:
- The date and time of the meeting.
- A list of attendees and absentees.
- A summary of the discussions held, including key points raised.
- The outcome of the vote (i.e., the decision to dissolve).
- Any resolutions passed during the meeting.
Review and approve the minutes at the next board meeting to ensure accuracy and completeness. Maintain these records for legal compliance and a clear trail of the decision-making process.
#2 File a Certificate of Dissolution with the Delaware Division of Corporations
This filing legally terminates the corporation’s existence, ensuring it is no longer subject to state reporting requirements, fees, or taxes. Failing to file this certificate can result in continued obligations such as franchise taxes and penalties, even if the business is no longer operating.
Types of Dissolution
There are two main types of dissolution filings in Delaware, depending on the corporation’s history:
- Short Form Dissolution: This is applicable when the corporation has not issued any stock and has no outstanding debts. It is a simplified process designed for corporations that do not engage in active business operations.
- Long Form Dissolution: If the corporation has issued stock or owes debts, it must file a Long Form Certificate of Dissolution. This process is more detailed, requiring disclosures about the company’s debts and asset distribution.
Process for Submitting the Certificate of Dissolution
To file a Certificate of Dissolution, the corporation must follow these steps:
- Prepare the Certificate: Complete the appropriate form based on whether the Short Form or Long Form dissolution applies. The form must include the corporation’s name, the date of dissolution, and any outstanding liabilities (for long-form filings).
- Payment of Fees: There is a filing fee that must be paid when submitting the Certificate of Dissolution. The actual value depends on additional services requested (such as expedited processing). Check the most current fee schedule on the Delaware Division of Corporations website.
- Processing Time: Standard processing usually takes 2-3 weeks. However, expedited processing options are available for an additional fee, with turnaround times as short as 24 hours for urgent requests.
Filing Options
Corporations have two options for filing the Certificate of Dissolution:
- Online Filing: The Delaware Division of Corporations provides an online portal where corporations can file the Certificate of Dissolution electronically. This is often the most efficient option, allowing for quicker submission and processing times. Payments can be made directly through the portal via credit card.
- Mail-In Filing: Alternatively, the completed form and payment can be mailed to the Delaware Division of Corporations. When opting for this method, include all necessary documents and the correct filing fee. Processing times for mailed filings can be longer due to postal delays and manual handling.
#3 Settle All Financial Obligations
When closing a Delaware corporation, settle all financial obligations to ensure a smooth dissolution process and to mitigate any potential liabilities. Here are the steps involved:
Pay Off All Outstanding Debts
Address any outstanding debts your corporation may have incurred. This includes obligations to vendors, loans from financial institutions, and any unpaid wages or benefits owed to employees. A thorough review of all financial records will help identify these debts.
Prompt payment will not only facilitate the dissolution process but also prevent any legal claims or disputes from creditors after the corporation has been closed.
Settle Taxes
Next, focus on settling all tax liabilities. This includes filing final state and federal tax returns, and ensuring all applicable taxes are paid in full. In Delaware, corporations are required to pay franchise taxes, which may vary based on the corporation's structure and revenue. Ensure these taxes are settled before dissolution.
It is advisable to consult a tax professional or accountant to accurately assess the total tax obligations and to comply with all filing requirements.
Ensure a Tax Clearance Certificate
Once all tax obligations have been satisfied, obtain a tax clearance certificate from the Delaware Division of Revenue. This certificate serves as proof that the corporation has fulfilled its tax responsibilities and is in good standing with the state.
Without this certificate, the dissolution process may be delayed or challenged, so it’s important to secure it.
Cancel Licenses, Permits, and Business Registrations
Finally, the corporation must cancel all licenses, permits, and business registrations associated with its operations. This includes local, state, and federal permits that may have been obtained during business.
By formally canceling these licenses and registrations, the corporation can prevent any future liabilities or fees associated with maintaining them. Also, retain copies of all cancellation notices for your records.
#4 Notify Creditors and Stakeholders
Once the decision to dissolve the corporation has been made and the necessary steps initiated, notify all creditors and stakeholders formally. This step is not only a legal requirement under Delaware law but also an important component of ensuring a smooth dissolution process.
Send Formal Notice of Dissolution to Creditors
Delaware law mandates that corporations must notify their creditors of the dissolution. This notification serves as a formal announcement of the company's decision to cease operations and provides creditors with the opportunity to make any claims against the corporation before assets are distributed.
The notice should include the date of dissolution, instructions for submitting claims, and a deadline for claims submission. It is advisable to send these notices via certified mail or another verifiable method to ensure receipt and maintain a record of the communication.
Settle Any Final Claims from Creditors and Stakeholders
This process involves reviewing all outstanding debts and obligations to determine which claims are valid and should be settled before the dissolution is finalized. Timely payment of these claims helps avoid potential legal repercussions.
Failing to settle debts can result in personal liability for corporate officers or directors, especially if creditors are not properly notified. Maintain clear documentation of all claims and their resolution, as this will prove that the corporation fulfilled its obligations.
Publish a Dissolution Notice
In addition to notifying individual creditors, it is advisable to publish a notice of dissolution in a local newspaper or other relevant publication. This practice serves two main purposes.
First, it provides public notice of the corporation's dissolution, allowing unknown creditors to assert any claims they may have. Second, it protects the corporation and its directors from future claims.
By publishing the notice, the corporation establishes a clear end date for its operations, which can help mitigate the risk of unforeseen liabilities arising after dissolution.
#5 Cancel Bank Accounts, Licenses, and Other Contracts
Once the decision to close a Delaware corporation has been made and formal dissolution steps are underway, ensure all business accounts, licenses, and contracts are properly addressed to prevent future liabilities and unnecessary costs.
Close Business Bank Accounts and Credit Lines
Contact your bank to initiate the account closure process. Before doing so, ensure all outstanding checks have cleared, and all transactions are completed.
In addition, transfer any remaining funds to the corporation's owners or shareholders as appropriate, following the legal guidelines for asset distribution. Also, obtain written confirmation from the bank regarding the closure of each account.
Cancel Business Licenses and Permits
This includes any local, state, or federal licenses that were required for the operation of the corporation. Each regulatory authority may have its process for cancellation. Contact the relevant agencies to notify them of the corporation's dissolution and request the cancellation of any active licenses or permits.
Terminate Contracts and Agreements with Third Parties
Terminate any existing contracts and agreements with third parties, including suppliers, landlords, and service providers. Review all contracts to identify those that need to be canceled and follow the specific termination procedures outlined in each agreement.
Notify all relevant parties in writing of the decision to dissolve the corporation and terminate their services. Also, settle any final obligations, such as payments or deliveries.
#6 Distribute Remaining Assets to Shareholders
When closing a Delaware corporation, distribute the remaining assets to shareholders according to established legal guidelines. Following the dissolution of the corporation, ensure all debts and obligations are settled before any distributions to shareholders occur. This approach protects the interests of creditors.
Legal Guidelines for Distributing Remaining Assets
The distribution of assets is governed by Delaware law and the corporation's governing documents, such as its bylaws and articles of incorporation. Shareholders may only receive distributions after the corporation has settled all outstanding liabilities. This process usually involves:
- Assessment of remaining assets
- Compliance with state laws
- Shareholder classifications
Priority of Distributions
Delaware law mandates that all debts and obligations be settled before any assets are distributed to shareholders. The order of priority is as follows:
- Creditors: Pay all outstanding debts, including loans, vendor payments, and taxes. This includes compensating any secured creditors as per the terms of their agreements.
- Preferred shareholders: If the corporation has preferred shareholders, they are entitled to receive distributions before common shareholders, according to the terms specified in the articles of incorporation.
- Common shareholders: Once all debts have been satisfied and preferred shareholders have received their distributions, any remaining assets can be distributed to common shareholders on a pro-rata basis, reflecting their ownership stakes.
Proper Documentation of Asset Distribution
Documenting the distribution of assets is important for maintaining transparency and accountability. Proper documentation should include:
- Board Resolutions: Record formal board resolutions authorizing the distribution of assets to shareholders. This documentation should detail the amount and method of distribution.
- Distribution Records: Maintain accurate records of the distributions made to each shareholder, including the date, amount, and any relevant calculations. This is vital for compliance and may be required for tax purposes.
- Shareholder Notifications: Notify shareholders of the distribution process, providing them with statements that outline their entitlements and the method used for calculating their shares of the remaining assets.
#7 File Final Tax Returns and Pay Franchise Taxes
When closing a Delaware corporation, address all tax obligations to ensure compliance with federal, state, and local regulations. This process includes filing final tax returns and settling any outstanding franchise taxes with the state of Delaware.
File Final Tax Returns
Corporations must file their final federal, state, and local tax returns before dissolution. This can be done in the following steps:
- Federal Tax Returns: Submit the final Form 1120, U.S. Corporation Income Tax Return, to the Internal Revenue Service (IRS). Indicate that it is the final return for the corporation by checking the appropriate box. Ensure that all income, deductions, and credits are accurately reported up to the date of dissolution.
- State Tax Returns: File the final Delaware corporate tax return. Use Form 1100, Delaware Corporate Income Tax Return, to report any income earned during the tax year. Similar to the federal return, indicate that this is the final return.
- Local Tax Returns: If the corporation operates in any local jurisdictions with tax requirements, confirm whether final local tax returns are necessary. Each locality may have different regulations and forms.
Pay Outstanding Delaware Franchise Taxes
Delaware requires all corporations to pay franchise taxes annually, even if they are in the process of dissolution. The steps to fulfill this obligation include:
- Calculate Franchise Taxes: Delaware’s franchise tax can be calculated using either the Authorized Shares Method or the Assumed Par Value Capital Method. Depending on the corporation's structure and the number of authorized shares, choose the method that yields the lower tax amount.
- Filing and Payment: Complete the Delaware Franchise Tax Report, which is usually due by March 1 each year. Ensure you pay any outstanding franchise taxes before filing the report. Payments can be made online through the Delaware Division of Corporations' website or by mail.
- Obtain a Tax Clearance Certificate: After paying all franchise taxes and filing the final return, request a tax clearance certificate from the Delaware Division of Revenue. This certificate confirms that all tax obligations have been met and is an essential document in the dissolution process.
#8 Retain Important Records
Retaining corporate records protects the interests of former shareholders, directors, and stakeholders. Keeping thorough documentation ensures businesses can respond effectively to potential audits, legal inquiries, or disputes that may arise in the future.
Properly maintained records can provide evidence of compliance with regulations and demonstrate the legitimate winding down of the business. Types of records to keep include:
- Financial records such as balance sheets, income statements, and cash flow statements.
- Tax documents including federal, state, and local tax returns for the final years of operation.
- Dissolution papers
- Meeting minutes and corporate resolutions
- Correspondence with creditors and stakeholders, such as notices of dissolution, settlement agreements, and any related correspondence.
Wrapping Up
Closing a Delaware corporation requires careful consideration and adherence to legal requirements. Properly following the steps discussed in this guide ensures the dissolution process is executed smoothly, thereby minimizing potential liabilities and ongoing fees.
It’s important to consult with legal and financial advisors to execute this process effectively. Also, address all debts, obligations, and formalities to protect yourself from future complications. Finally, retain important records related to the corporation's dissolution for reference and compliance with regulatory requirements.
FAQs
What happens if you don't dissolve Delaware Corporation?
Failing to dissolve a Delaware corporation can lead to:
- Continued franchise tax obligations
- Loss of limited liability protection
- Difficulty selling assets
- Legal and tax complications
- Reputation damage
What is needed to dissolve a Delaware LLC?
To dissolve a Delaware LLC, you will need:
- Certificate of Dissolution
- Articles of Organization
- Proof of notice (this can be done through a written notice or by publishing a notice in a Delaware newspaper)
- Winding up of affairs (pay off any debts, distribute assets to members, and close any outstanding accounts)
- Tax compliance
What is the administrative dissolution of a corporation in Delaware?
Administrative Dissolution in Delaware is a process where the state government dissolves a corporation due to its failure to comply with certain statutory requirements. This usually occurs when a corporation:
- Fails to file annual reports
- Does not maintain a registered agent
- Does not pay franchise taxes
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