Business Entity Termination
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.
Depending
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.
If
you need assistance with terminating an entity or
related advice, contact Newland & Associates.
Copyright 2011
Published by the law firm of Newland &
Associates, PLC
9835 Business Way
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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