Dissolution is often the final stage in a business’s life cycle. The owner or entrepreneur in charge of the organization files paperwork with the state to officially end the company. They will sell off or liquidate remaining business assets and cease doing business altogether. At the end of the dissolution process, the separate legal entity that was once the company will no longer exist.
Business dissolution could serve as a response to a lawsuit from consumers over a product defect that has forced a company to close or slowly shrinking profit margins that have made continued operations financially irresponsible. It could also be the proposed solution to a dispute between business partners or the decision made by the board of directors after a takeover of a previously closely-held organization by a hedge fund.
Some financial liabilities can lead to challenges
The type of business someone plans to dissolve and their conduct while running the company will have a major influence on what happens with organizational debts. Most times, the dissolution process involves communicating with creditors and settling debts based on the remaining assets the business has. Successful dissolution typically means the company resolves all obligations and divests of all remaining assets.
When companies do not have the resources to repay all debts, creditors may close accounts or settle for partial payment depending on the circumstances and the nature of the debt. In certain cases, such as when people intend to dissolve sole proprietorships or partnerships, some liability can pass to the owners.
In fact, even when someone starts a limited liability company (LLC) or a more complex corporation, it may be possible for creditors and plaintiffs in civil lawsuits to pierce the corporate veil and hold an owner personally responsible for an organization’s financial obligations if there are mistakes in paperwork or records of certain kinds of financial misconduct.
Occasionally, dissolution may require a bankruptcy filing to eliminate business debts. Ideally, appropriate record-keeping and proper financial practices protect owners from liability for business debt during the dissolution process. Understanding the challenges that can arise during business dissolution can benefit those who are preparing for the end of their company and also those planning for the launch of a new business and who want to be proactive in their approach.