Corporate/LLC Dissolution: Should I Dissolve It Now or Wait for 2007?

Almost everything you read about incorporation is directed to starting a business enterprise, the best options to consider and which state in which to set up the legal business structure. Seldom does anybody address the closure or dissolution of a business enterprise. But dissolution is an important thing to consider when, for example, a business venture is simply not profitable or marketable for sale to others, or owners retire or redirect their energies to other ventures in life.

So is it important to consider dissolving a business if there is no planned future activity? What is the process for dissolving the business? Is there an advantage to dissolving the business now, or should you just wait for the mad rush to end and take action on this next year?

Importance of Dissolving the Corporation/LLC

If you no longer have any plans to conduct business with an existing corporate or LLC enterprise, here are some obligations you may have to consider before the end of 2006:

You may have to submit tax returns to the IRS, many state and some local taxing authorities.

Your potential business liabilities within the limits established by the legal business structure, and personal liabilities beyond the legal business structure, remain exposed. Even a proprietary LLC has potential liability exposure to the limit of capital invested by the owners.

If your company sells a product, potential liability exposure remains in effect until you stop selling the product and dissolve the company.

If you don't legally dissolve the corporation/LLC before the end of 2006, you may be required to submit an annual report for 2007.

Remaining corporate assets, and their distribution among the shareholders, will not occur until you dissolve the company.
Process for Dissolving the Corporation/LLC

You need to be very careful not to make mistakes or omissions in the dissolution process, especially if you are concerned about completing it before the end of 2006. It is not as simple as the formation process. You must do the following:

Formal Corporate Action – Hold a meeting of the board of directors, propose and pass on the dissolution of the corporation, and make sure the action is recorded.

Filing dissolution notice with the state in which the company resides – This process varies from state to state. So review our previous article on dissolution. Inquire about your state's requirements and follow suit accordingly.

Notice to Creditors – Inform all your creditors of the dissolution procedure.

Processing Claims - Honestly, pay off your accounts and notes payable. Avoid any difficulties slowing down or barring this process until 2007.

The IRS – This is where the homework really begins. Potentially, there is a slew of procedures you might have to follow to properly dissolve the company. Here is a list of actions to consider:

Apply for a new employer identification number if changing business form.
Form SS-4, Application for Employer Identification Number.

Report corporate dissolution or liquidation.
Form 966, Corporate Dissolution or Liquidation.

Form 1120S, U.S. Tax Return for an S Corporation. Instructions.

Report business asset sales.
Form 8594, Asset Acquisition Statement.

Report the sale or exchange of property used in your trade or business.
Form 4797, Sales of Business Property.

Report exchange of business property that meets the like-kind exchange rules.
Form 8824, Like-Kind Exchanges.

File for business casualties and thefts.
Form 4684, Casualties and Thefts.

Report any recapture of investment credit claimed on property sold.
Form 4255, Recapture of Investment Credit.

Report capital gains or losses.
Form 1040, U.S. Individual Income Tax Return.
Form 1065, U.S. Partnership Return of Income.
Form 1120 (Schedule D), Capital Gains and Losses.

Report partner's/shareholder's shares.
Form 1065 (Schedule K-1), Partner's Share of Income, Credits, Deductions, etc.
Form 1120S (Schedule K-1), Shareholder's Share of Income, Credits, Deductions, etc.

File final employee pension/benefit plan.
Form 5500, Annual Return/Report of Employee Benefit Plan.

Issue payment information to sub-contractors.
Form 1099-MISC, Miscellaneous Income.

Report information from 1099s issued.
Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

If the company had employees there is another, potentially lengthy list of things to do:

Make final federal tax deposits.

File final tip income and allocated tips information return.
Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.

File final quarterly or annual employment tax form.
Form 941, Employer's Quarterly Federal Tax Return.
Form 943, Employer's Annual Tax Return for Agricultural Employees.
Form 943-A, Agricultural Employer's Record of Federal Tax Liability.

Issue final wage and withholding information to employees.
Form W-2, Wage and Tax Statement.

Report information from W-2s issued.
Form W-3, Transmittal of Wage and Tax Statements.

Pay final federal unemployment taxes.
Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (PDF).
Need I say more????? If you plan to dissolve this company, then begin now!

Why Now and not in 2007?

Very simply, if this company is not realistically in an operational mode, dissolve it now. If this company is not generating profit or offering some form of tax relief to its owners/shareholders, dissolve it now. If there is simply no tax advantage to delaying this process, then dissolve it now.

Talk to your legal and financial representation. If, after consulting with them, you learn there is no advantage to keeping this legal business structure in existence into 2007 then waste no time.

MyCorporation.com provides the laundry list of services to facilitate your dissolution process:

Access and download the free Corporate/LLC Resolution forms to begin the process,

If necessary, find an accountant to help facilitate the dissolution process,

We have already provided a list of hyperlinks above to IRS forms for matters associated with the company and its employees.

Oh, and don't forget that if there is a distribution of remaining assets to the owners/shareholders, you need to file Form 1099-DIV for each recipient.

Finally, begin the Articles of Dissolution process.
If you have any questions, go to the MyCorporation.com Articles of Dissolution FAQ's page. It clearly answers all the basic questions about this process. If you need further assistance go to MyCorporation.com's Live Help line.

We are coming to the end of another year. Make the right decisions, seek the right kind of advice and then act on it.

I wish all of you the very best, now and into the future.