Dissolving a business, also known as “voluntary dissolution,” can be simple or complex, depending on a number of variables, including how the business was established, who the owners are, and what the desired outcome may be. In any case, a properly drafted Partnership Agreement or Operating Agreement between owners makes the process significantly easier. Without such an agreement, the dissolution process can be chaotic and expensive, especially when business owners do not see eye-to-eye.
Authorizing a Dissolution
The form and ownership structure of a business generally determines who can make the decision to dissolve and the circumstances in which dissolution is appropriate.
A General Partnership may be dissolved by the agreement of the partners, or in circumstances in which it is no longer practicable to carry on with the business. In addition, when a partner leaves the business, also known as “dissociation,” the partnership will generally have to dissolve. Dissociation may occur by a partner’s withdrawal, death, incapacity, or any other manner of exiting the business.
A Limited Liability Company, or “LLC,” may be dissolved by the agreement of the company’s owners, called “members.” Like a General Partnership, an LLC may also be dissolved in circumstances in which is no longer practicable to carry on with the business. If a member decides to leave the LLC, it does not necessarily mean the business will dissolve; although, this depends on the agreement between the members, called the “Operating Agreement.”
For a Corporation, the ownership structure determines how a dissolution is authorized. If the Corporation has not issued shares, then the incorporators or directors may authorize a dissolution. On the other hand, if shares have been issued, dissolution must be proposed or approved by the shareholders.
The Process of Dissolution
After a dissolution is authorized, the business owners are required to “wind up” the affairs of the business before it is closed. Winding up may include collecting on accounts, paying debts or other bills, and handling any other outstanding obligations and liabilities of the business. In addition, the business’s assets must be liquidated and distributed among owners after creditors are paid. Winding up a business is a complicated process with many legal, financial, and tax consequences. Generally, professional assistance from an attorney and an accountant is required to properly dissolve a business.
Once the winding up is completed, the business must submit a filing with the Illinois Secretary of State to finalize the dissolution. For a General Partnership, it is a Statement of Dissolution; for an LLC, a Statement of Termination; and for a Corporation, Articles of Dissolution.
Agreements Between Owners
In general, dissolution should be governed by an agreement between business owners. A General Partnership should be structured by a Partnership Agreement which provides circumstances in which dissolution is appropriate and the process of dissolving the business. The same is true for Operating Agreements governing the management and operation of LLCs. For a Corporation, dissolution may be governed by the corporate “By-Laws” or by a “Plan of Dissolution” approved by the directors and/or shareholders.
In any case, a business should have a well-drafted agreement which makes certain when dissolution will occur and how it will be managed. These agreements avoid unnecessary disputes between business owners by making certain the terms of dissolution before it occurs.
Arnett Law Group, LLC
At Arnett Law Group, we recognize the importance of protecting the future of your business. The prospect of dissolving your business may involve uncertainty and unpredictability, which can be avoided with well-drafted agreements between business owners, with the assistance and advice of the experienced business law attorneys found at www.arnettlawgroup.com.