When a Business Ends

By: Nathan M. Brandenburg, Esq.

What happens to a corporation or limited liability company when the entity is no longer transacting business? Many think that they merely need to forgo completing the annual business registration with the Secretary of State to effectively “end” the business. However, if the business transacted any amount of commerce—however minute—certain procedures under Minnesota law should be followed to protect the business’s owners from any potential ongoing liability.

When a business fails to renew its corporate status with the Minnesota Secretary of State in a timely manner, it is placed on “inactive” status and administratively dissolved. This means that the business’s name is no longer reserved for the business and the entity no longer affords its owners the liability protection it was designed to provide. Often times, businesses simply forget to renew their corporate status, in which case the Secretary of State will reinstate the corporate status for an administrative fee. Given the serious implications that can arise from a failure to renew corporate status or to affirmatively continue the legal registration of a business, it is extremely important to provide accurate and timely filings to the Secretary of State.

The owners of an administratively dissolved business still remain liable for any debts or obligations of the business. Hence, it is important that the full dissolution process is followed in order to completely wrap-up any remaining obligations the business may have so that the liability of its owners ends with the final dissolution of the business.

In Minnesota, corporations “dissolve” and limited liability companies “terminate.” For consistency, this article will use terminology applied to corporations. However, the termination of a limited liability company is almost identical and hence, the same procedures and rationale likewise applies.

Dissolution With Notice to Creditors:

The dissolution of a corporation begins with a vote or written action of the corporation’s shareholders. Upon their affirmative vote, the corporation files a Notice of Intent to Dissolve with the Minnesota Secretary of State. Upon the filing of the Notice of Intent to Dissolve, the corporation must publish notice of its intent to dissolve once per week for four consecutive weeks in a print periodical that is published in the county in which the corporation’s executive office is located. The publication of the Notice of Intent to Dissolve is designed to put any potential creditors of the corporation on notice of the corporation’s dissolution. Furthermore, any known creditors of the corporation must be provided with similar notice via United States Mail. Said creditors then have ninety days from the first date of the Notice’s publication to present their claims to the corporation. If a creditor fails to submit its claim within said ninety day period, the claim is extinguished. Hence, it is extremely important that the creditors of a dissolving corporation are properly notified so that said claims can either be resolved or extinguished, thereby eliminating any potential liability the shareholders of the corporation may have upon the cessation of business activity.

During the ninety day creditor notification period, the corporation should pay all known debts, collect all outstanding receivables and otherwise wind-up its business. The last step in the dissolution process is the filing of the Articles of Dissolution with the Minnesota Secretary of State, which signals the formal end of the corporation.

Dissolution Without Notice to Creditors:

A corporation need not provide notice to its creditors prior to its dissolution. However, if a corporation fails to give notice to its creditors, said creditors may bring a claim against the corporation for up to two years after the corporation formally dissolves. Hence, the corporation’s shareholders could potentially be liable for claims lodged against the corporation for up to two years after the dissolution of the corporation. As such, most corporations choose to notify potential creditors in order to eliminate such possibilities and facilitate final and timely distributions to shareholders, if possible.

Dissolution by the Incorporator or the Director(s):

A corporation that has not issued shares may be dissolved by its incorporator or directors simply by filing its Articles of Dissolution with the Minnesota Secretary of State. No notification of creditors is required.

Distributions to Owners Upon Dissolution:

After a dissolving corporation has wound-up its business affairs and satisfied all liabilities, its shareholders are entitled to the distribution of any remaining funds, if any, proportionate to their ownership interest (for Subchapter S corporations and C corporations with a single class of stock) or pursuant to some other arrangement (for C corporations with different classes of stock). However, unsatisfied creditors can obtain distributions prematurely made to shareholders prior to the determination of the amount of remaining profits, if any. Hence, it is important to wait to issue shareholder distributions until all creditor claims have been satisfied.

Conclusion:

The proper dissolution of a corporation is as important as its formation. Dissolution should effectively end the potential liability of its shareholders in an expeditious manner and provide reasonable surety that shareholders may retain any distributions made by the corporation. If dissolved or abandoned improperly, a corporation may render its shareholders liable for its obligations for years after the business ceases.