Volume 15 Issue 4 -- July/August
Volume 15 Issue 4 -- July/August 2011
What happens to the assets and owners of a business entity, such as a partnership, corporation, or LLC, when its existence ends? Many times, particularly with smaller entities, the process is not adequately planned or implemented.
If the entity has assets and more than one owner, there should be a plan of formal termination. In most cases, there should be consideration of a plan of liquidation which would envision distribution of assets among the owners after the payment of creditors.
By law, the owners of the business entity can receive business assets only after all creditors are paid or provided for. Careful identification of the business’s creditors, those with both actual and potential claims, is critical.
Failure to provide adequately for the payment of claims can result in personal liability for the owners after the business entity is terminated.
Payment of outstanding tax liabilities, both federal and state, should be addressed. This includes not only income taxes but also other tax liabilities, like sales taxes and employment taxes.
Often when entities are terminating because of financial decline, there are problems with non-payment of IRS payroll or withholding taxes. Unpaid withholding taxes of a business entity can be converted to personal liabilities of the “responsible parties.” Typically, these “responsible parties” include shareholders or other owners, officers, and employees of the terminating entity.
In nearly all states, there are similar laws for state withholding taxes as well as sales taxes.
If a business has been struggling, it often happens that these types of tax liabilities have not yet been assessed at the time the business closes. This is one reason why it is imperative to identify any potential claims against the business before planning for the distribution of its assets.
Ordinary business entities — partnerships, corporations, and LLCs — are created under state law. In most states, particularly for corporations and LLCs, there are formal requirements to be met before the entity will be considered terminated. Typically, it is necessary to file something called “articles of dissolution” or a similarly named document with the state in which the entity was created in order to end its existence as a matter of law. If the business entity operated in more than one state, it may be necessary to file such documents in each of those states.
Even though most commercial entities are not created under federal law, terminating a business for tax purposes also requires certain forms and filings. For example, terminating distributions from a corporation to a shareholder are usually subject to special reporting requirements and are subject to tax.
When liquidating or terminating an entity in an orderly fashion, there should be a plan for the payment of taxes, distribution of assets, termination of various licenses, etc. In the worse case scenario if the owners cannot agree, and are hopelessly deadlocked, there can be judicial supervision of the termination of the entity.
In the case of partnerships, there are special termination considerations. For example, if there is a sale within any one year of more than 50% of the interests in the partnership, the partnership is deemed to be terminated automatically under federal tax law. Without proper planning, this can sometimes have unintended consequences.
Often the owners of dying businesses believe that it is simply not worth the cost or the legal and filing fees necessary to formally terminate the entity. As a result they will sometimes simply close the doors, take the assets and let the entity die on the vine, without any formal filings.
on state law, after a specified number of years
of not filing annual reports (two in
While this approach will terminate the entity's existence for state law, it will not necessarily terminate the owner’s liabilities under either state law or tax law. Without sound planning, this can lead to unpleasant surprises.
you need assistance with terminating an entity or
related advice, contact Newland & Associates.
Published by the law firm of Newland & Associates, PLC
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Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.
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