Corporations and Law

Voluntary Terminations

The voluntary termination of a corporation is a three-step process. First, a majority of shareholders agree the corporation should be dissolved; next, the articles of dissolution is filed with the secretary of state; and finally, managers wind up the corporation to pay debts and then pay shareholders with the remaining money.

A corporation's survival is not guaranteed. A corporation may be merged with or acquired by another corporation. However, when the shareholders voluntarily decide to terminate a corporation, certain steps must be followed. The voluntary termination of a corporation involves three steps: voting, filing, and winding-up.

In the voting stage, the directors recommend to the shareholders that the corporation should be dissolved. Generally, the majority of shareholders must agree with the directors' recommendation to terminate. However, the corporation's bylaws might provide other rules about who must vote, how the vote is conducted, and the number of votes needed for termination.

The second step is the filing of the articles of dissolution with the secretary of state in the same jurisdiction in which the corporation was incorporated. The articles of dissolution is a document that formalizes the end of a corporation's existence. It informs the state that the corporation is ending and will no longer be filing reports and paying taxes and fees. The articles of dissolution also alerts creditors that the corporation has been terminated. Each state may require different information to be included in the articles.

The third and last step is winding-up, in which officers of the corporation complete unfinished transactions, pay the corporation's debts, and distribute any remaining property and profits to shareholders. Once winding-up (also called liquidation) begins, the corporation can no longer engage in its regular business activities and can only act in ways that contribute to the winding-up. Once the winding-up has completed, the corporation ceases to exist.

Member versus Creditor Winding-Up

Member Winding-Up Creditor Winding-Up
Applies to solvent companies (those able to pay debts) Applies to insolvent companies (those unable to pay debts)
Company controls winding-up Creditor controls winding-up
Members of the corporation appoint the liquidator Members and creditors may appoint a liquidator
No committee of inspection Possibility of a committee of inspection

Winding-up works differently depending on who begins it. When the corporation starts the winding-up process, it has more control.

Involuntary terminations involve the secretary of state and may be pursuant to bankruptcy or a court order for criminal action. The secretary of state may terminate a corporation that has failed to comply with state requirements, such as paying required taxes or fees or filing annual reports. It is common among smaller corporations not to formally terminate the corporation but instead to wait for the secretary of state to act. A court may terminate a corporation by court order if the corporation is insolvent, meaning that it is unable to pay its bills, or if the corporation's directors and shareholders cannot resolve substantial disputes about how to manage the corporation.