Closing a business is rarely as simple as just stopping operations. Whether due to retirement, financial challenges, or a strategic decision, dissolving a company requires careful legal steps to avoid future liability. Failing to follow the proper process can leave owners exposed to lawsuits, tax issues, or unresolved obligations.
If you’re considering winding down your business, it’s important to have legal guidance from the start. Contact Demorest Law, PLLC, in Royal Oak for an initial evaluation with a Michigan business attorney to learn how we can help you navigate the dissolution process and protect your interests every step of the way. Our lawyers serve all of metro Detroit, greater Wayne, Oakland, Macomb, Livingston, Washtenaw, and Monroe counties, and businesses statewide.
Types of Business Dissolution
A business dissolution can occur in several ways. The primary types of dissolutions include:
- Voluntary Dissolution – A company’s partners, members, or shareholders may vote to dissolve the business. The process of a voluntary dissolution occurs under applicable state law and the business’s governance documents, such as bylaws, partnership agreements, or operating agreements.
- Administrative Dissolution – An administrative dissolution occurs by order of the Secretary of State when a company fails to file its annual statements or fails to maintain a registered agent. When an administrative dissolution occurs, a business can no longer legally operate, and its owners may lose any limited liability protection offered by the business form. Continued operation could expose owners to personal liability and possible administrative penalties. However, businesses can reinstate their good standing after an administrative dissolution in many circumstances.
- Judicial Dissolution – A judicial dissolution occurs when a court orders the winding up of a business. A court may order the dissolution of a company upon a petition by one or more of its owners, usually due to voting deadlocks, mismanagement, or minority-owner oppression. Courts can also order the judicial dissolution of businesses used to perpetuate fraudulent activity or to engage in other misconduct.
Key Legal Steps in Business Dissolution
At Demorest Law, PLLC, our attorneys can assist Royal Oak business owners in conducting an orderly voluntary dissolution of their company under state law. The dissolution process involves several stages, including:
- Internal Approval – A business must first authorize or approve dissolution, which may occur under applicable state law or the company’s governance documents. In most cases, a business’s owners must vote to approve dissolution; for a corporation, the board of directors may recommend dissolution to shareholders. However, a company’s governance documents may establish specific procedures for voting on a voluntary dissolution.
- Winding Up Affairs – When a company decides to dissolve, it must wind up its affairs before terminating its legal existence. The winding-up of a business will involve collecting its assets and accounts receivable, selling or transferring assets that it will not distribute in kind to its owners, paying debts and liabilities, and distributing any remaining cash and assets to its owners.
- Filing Articles of Dissolution – The dissolution process requires the company to file a certificate of dissolution with the Secretary of State to notify the state of the company’s intent to dissolve and its owners’ vote to approve dissolution. Michigan businesses must also obtain a tax clearance certificate from the state treasury department within 60 days of filing for dissolution.
- Final Termination – The dissolution process ends with the business entity’s termination. Dissolution generally refers to the process of winding up a company’s affairs to end its legal existence. Termination refers to the final step of the dissolution process, where the company legally ceases to exist.
Businesses and their owners should seek experienced counsel from knowledgeable business attorneys to guide them through the dissolution process to ensure they follow all required steps.
Addressing Debts, Liabilities, and Creditor Claims
Dissolving businesses must pay off their outstanding debts and liabilities to avoid passing any liability on to the company’s owners. Companies must provide notice of their dissolution, including sending direct notice to known claimants or creditors and publishing notice for unknown claimants. Known claimants of Michigan corporations typically have six months to file claims. In contrast, unknown claimants usually have one year from the newspaper publication of the corporation’s dissolution to file their claims.
Distributions to Owners and Tax Considerations
After paying off outstanding debts and liabilities, a company may distribute its remaining cash and assets to its owners. The business’s governance documents, including bylaws or partnership/operating agreements, may establish a specific priority for distributions, with holders of particular classes of equity entitled to priority distributions. Businesses organized as partnerships or LLCs may have capital accounts for each partner or member that the company must settle with its remaining cash or assets.
Distributions of cash and assets during business dissolution can have tax implications for owners, making it essential for the company and its equity holders to seek legal and financial advice regarding liabilities or tax obligations flowing from a dissolution.
Distributing assets to owners in dissolution can also involve a risk of personal liability if a company mishandles notice to creditors or payment of outstanding debts and liabilities. Creditors with viable claims against a dissolved business may have the right to pursue recovery from the business assets distributed to owners. Having a law firm’s assistance during dissolution can reduce the risk of unexpected liabilities after the company’s formal termination.
Common Legal Pitfalls
A business dissolution can involve various legal challenges or risks of mistakes, such as:
- Disagreements among owners over the decision to dissolve
- Allegations of breaches of fiduciary duties against controlling owners or directors
- Minority shareholder/equity owner claims
- Inadequate financial recordkeeping
- Improper or premature asset transfers
- Dissolving before the resolution of ongoing litigation or regulatory investigations
- Failing to comply with statutorily required dissolution procedures, including notice to creditors or filing of a certificate of dissolution
Why Choose the Lawyers at Demorest Law, PLLC?
Winding up a business in Royal Oak involves a complicated legal procedure, making legal representation critical to secure a proper and efficient dissolution. Let a seasoned attorney from Demorest Law, PLLC, advise you and your partners or co-owners as you undertake the dissolution of your business because:
- Our law firm will provide you with the personal attention and comprehensive support you need to navigate the complex issues associated with dissolving a business. Our lawyers regularly work with small- and medium-sized businesses and also have experience advising larger companies with high-stakes transactions.
- When you choose our law firm to assist you with a business dissolution, you can expect our attorneys to sit down with you to understand your goals, needs, and concerns and provide you with tailored legal advice and solutions. Our dedication to achieving optimal results has earned us the trust of clients who have worked with our law firm over the years.
- Our lawyers strive to fulfill our values of integrity, efficiency, communication, teamwork, and civility to ensure that you receive the high-quality legal representation you need and deserve.
Contact Our Royal Oak Law Office Today for Experienced Guidance Through the Business Dissolution Process
If you’ve decided to shut down your business, an orderly dissolution can go a long way toward protecting your legal and financial interests. Get the legal support you need to navigate the wind-up process. Contact Demorest Law, PLLC, today for a confidential consultation with a Michigan business lawyer to learn more about what to expect in business dissolution and to understand how our Royal Oak law firm can assist you. We’re pleased to support businesses statewide, including in metro Detroit and throughout Wayne, Oakland, Macomb, Livingston, Washtenaw, and Monroe counties.
