If the corporation fails to file its annual renewal in any calendar year, the Secretary of State files a certificate of administrative dissolution for that business.  Failed startups or even disbanded business may think that simply failing to file the annual renewal will automatically dissolve the business and thus protect them from their creditors.  However, nothing could be further from the truth!  Administrative dissolution suspends, but does not terminate the corporate existence. Thus creditors and claimants may bring actions or pursue enforcement against the corporation, and shareholders may be liable for distributions received in violation of the statute.  The lesson here is if you are closing down the business, don’t forget to take the appropriate steps and file the necessary paperwork for voluntary dissolution.

So, while we may be talking about dissolution, it is also important for the ongoing, viable business to remember to file its annual renewal with the Secretary of State.  I recommend either filing on the anniversary on the date you started your business, or by December 31^st of each year.  And, if for some reason you forgot, all is not lost, you can cure an administrative dissolution by filing the required corporate renewal form plus a small fee.

The third type of dissolution is the involuntary dissolution by shareholder action.  When a corporation acts unfairly or illegally, involuntary dissolution can be a remedy for minority shareholders, unpaid creditors, or even the Attorney General.  In this situation a court may dissolve the corporation, or worse grant equitable relief it deems just and reasonable.  I hope you never find yourself in this position as it is costly, rarely ends well and of course disrupts (and could possibly bankrupt) the business.

Whether to give notice to your creditors or not depends on several factors, do you want to slip away quietly in the night, do you want the risk of creditors finding you well after your company has shut down, perhaps you don’t want to alarm your customers because someone is buying your assets (i.e., the customer list), etc. The board should determine what course of action is best for their circumstances.

The first option is to provide notice to creditors. This is done in two steps: first for your known creditors written notice by mail or personal delivery must be made. All other creditors are notified through publication of notice once a week for four consecutive weeks in a legal newspaper.  While putting the world (your community) on notice that you are closing your doors may be hard, it does shorten the period in which a creditor may come after you.  Except in a few limited circumstances, all claims must be received 90 days after the date of first publication in a legal newspaper (for unknown creditors) or 90 days after the mailing of delivery of notice to known creditors.  After this period the creditor is barred from suing on that claim.  After the 90 day notice period has passed and there are no legal, administrative or arbitration proceedings against the company pending, articles of dissolution must be filed with the secretary of state.

Alternatively, and depending on your business, dissolution may occur with no notice to creditors. Not providing notice allows a company to forgo the claims process and limit publicity which may be strategically advantageous, but it does leave open a much longer period of time for creditors to assert claims.  If you decide not to provide notice, the timing on filing the articles of dissolution depends on whether your creditors have been fully paid or not.  If payment of claims of all known creditors has been made or provided for, you may immediately file articles of dissolution.  However, if claims of all known creditors have not been paid, the company must file the articles of dissolution after at least two years have elapsed from the date of filing the notice of intent to dissolve.  If the company dissolves without giving notice, a creditor has two years from the filing of the notice of intent dissolve to pursue a claim, after which time the creditor is barred from enforcing a claim.

Again, each situation is unique.  Consider which option works best for your company, consult with your attorney and move forward to the next chapter in your life!

Next month, part three of this three part series will discuss administrative dissolution.

There are two forms of voluntary dissolution: dissolution without outstanding shares and dissolution with outstanding shares. (Note: this article is referring to corporations, there are similar rules for limited liability companies, partnerships and professional firms).

If the corporation has no outstanding shares, a majority of the incorporators or directors may dissolve the corporation by filing articles of dissolution (see Minn. Stat. §302A.711, subd.1, 2(a)).  Once filed the corporation is dissolved.

However, most companies issue shares at the time of formation, therefore the process is a bit more involved.  Voluntary dissolution must be authorized by the shareholders of the company and approved at a meeting of the shareholders.  Written notice of such meeting must be given to every shareholder (whether entitled to vote or not).  Dissolution must be approved by an affirmative vote of the holders of a majority of the power of all shares entitled to vote.

Once the dissolution is authorized by the shareholders, the company must file a note of intent to dissolve with the Secretary of State. Note, once this notice is filed the corporation must cease all business except for the winding up of the corporation.  However, during this period, the board must collect the debts due or owing the corporation; pay all debts, obligations and liabilities of the corporation according to their priorities, and give notice to creditors or follow the procedures for dissolution without notice under Minn. Stat. §302A.2971.  After satisfaction of all debts, obligations and liabilities, all property must be distributed to the shareholders.

There is a strategy to consider in whether to provide notice to your creditors or to simply follow the procedures for dissolution without notice which will be discussed in part two of this three part series.

My efforts paid off!  I am proud to announce that budgelaw.com was named one of Minnesota’s Top 25 Legal Blawgs – for the second year in a row!!  See http://practiceblawg.com/top25/2011-selections/.

The simple message here is unless you believe you have adequate insurance, or the nature and type of your business doesn’t provide a lot of exposure to liability, then fine test the waters by hanging up your shingle as a sole proprietor (doing business under an assumed name). But if you are providing certain services, selling products, hiring employees, etc., take the time and incorporate your business.  And as always, when in doubt call an attorney to discuss the pros and cons of both!