Often a new business is started with high expectations of success and profits, perhaps on a national or worldwide scale. We imagine that our little company will grow into the next Honeywell, Microsoft, or dare we say Snapchat. Or we just imagine that our company will succeed in the town in which we live, provide an income for us and our family, and fund our retirement. There are many examples of well-run, successful companies in our area communities. But there are also many examples of companies that did not succeed and for any number of reasons.
For a business that does not succeed, there are the obvious things that take place such as a liquidation sale, closing of doors, laying off employees. Bank accounts are closed and agreements terminated. Debts may or may not be paid. What’s not so obvious is that the entity behind the business, whether a corporation or LLC, can be formally dissolved.
A corporation or LLC can be dissolved voluntarily. The members of the LLC or the shareholders of the corporation, as the case may be, may decide and agree that the business entity should be terminated. For a voluntary dissolution, the owners should look to the governing documents of the entity to determine whether they set forth a process for the ‘winding up’ of the business and dissolution.
In the absence of a process in the governing documents, Minnesota statutes set forth the voluntary dissolution process for LLCs and corporations, including specific steps for entities to follow to ‘wind up’ the affairs of the business. Generally, these involve providing notice to creditors; paying debts and other obligations of the entity; dividing up the assets of the entity among owners; making a final distribution of profits, if any, to members or shareholders; and filing the appropriate dissolution paperwork with the Minnesota Secretary of State.
In some cases, the dissolution of an LLC or corporation is not voluntary. Minn. Stat. 322C.701 provides that a Minnesota LLC can be dissolved by court order through an action brought by a member or by the Attorney General. While an action by the Attorney General is rare, it is not uncommon for member owners who are in disagreement about the management or other affairs of the business to seek redress in district court. A judge can order dissolution or other appropriate relief under the statute.
Minn. Stat. 302A.751 sets forth a similar process for the involuntary dissolution of a Minnesota corporation. Under this statute, a shareholder can bring an action in court for equitable relief, dissolution, or a buy-out.
When we start a business, we certainly don’t expect it to result in a lawsuit between owners and a court-ordered dissolution. This is a worse-case scenario, of course. Even with high hopes and expectations, most business owners understand that the business may not succeed in the end. So, if this happens, going through the process to dissolve the entity would be appropriate and beneficial.
A formal dissolution puts the world on notice that the entity is no longer going to be in business. A formal dissolution also gives owners the opportunity to notify creditors and others to make any claims they may have against the business. After a period of time, creditors claims will be barred. A formal dissolution also frees up the company name for others to use to form an entity. If not formally dissolved, there’s a risk that someone else conducts business under your business name, and a creditor comes after you.
Do we have to do this? Actually, no, the Minnesota Secretary of State will dissolve your company for you, if you do not complete your annual renewals. This is called an ‘Administrative Dissolution’ and then after approximately 12 months, the SOS will complete a permanent dissolution. Many owners may think this will take care of it, but an administrative termination for non-renewal hangs out there for 12-16 months until a final termination is done by the Secretary of State. A formal dissolution makes it final now.
Any requests for topic suggestions may be sent to firstname.lastname@example.org. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.