Dissolving a Business Entity: Why & How

/ March 9, 2015

Calculator - iStockOftentimes, on the cusp of starting a new business, a business owner(s) is excited, slightly anxious, and cautiously optimistic about the future. In this haze of excitement, what often is not discussed, considered or even understood, is what happens if the business does not succeed, or, the owner(s) simply wants out. According to the Small Business Administration, only 50% of small businesses survive 5 years or more and only one-third make it to 10 years. Besides the business failing, changes in the owners’ circumstances, such as disagreement among co-owners or life events that prevent owners from growing their business, might require the business come to an end.

Why Dissolution Is Important

For whatever reasons the business ends, the owner(s) should formally dissolve their business entity (that is, if a business entity was formed in the first place). Until the Secretary of State’s office is aware that a business is no longer in operation, the business may still need to file annual reports, pay taxes and have additional obligations. Therefore, it is important for an owner(s) to formally dissolve the business, instead of waiting for the state to administratively do it. Dissolution will ensure:

  • Owner do not have personal liability for judgments against the business
  • Creditors on notice that the business can no longer incur debts
  • No penalties and fees are assessed
  • No unnecessary registered agent service payments are made

Secretary of State

Typically, to dissolve a business entity, dissolution paperwork needs to be filed with the Secretary of State’s office where the business entity was formed. Additionally, if the business filed paperwork in other states, those states should be informed as well. In some states, the paperwork will involve ensuring all debts and liabilities have been paid and whether any assets were distributed.

If you are unsure about the requirements in your state, contact a business attorney and be sure to check with your accountant regarding possible tax implications of dissolving your business.