The last thing any startup entrepreneur ever wants to think about is the process of dissolving their company. Given the exceptional failure rate of startups in today’s economy, it is not uncommon for entrepreneurs to dissolve a startup at least once throughout their careers. Planning ahead for a potential dissolution can save in legal disputes in the future.
The process of dissolution is important and it does not simply occur overnight. Rather, the process must be completed carefully (in most cases, with the help of an experienced Silicon Valley business attorney) in order to ensure proper compliance with all requirements. Failing to comply with all requirements for dissolution can expose the startup founders to many legal liabilities. Dissolution is commonly completed in the 6 major steps that follow:
- Approving the Dissolution
A company cannot dissolve if there is not a formal process in which the owners/members approve the company’s dissolution. This process will vary based upon the business entity. The two most common entities are corporations and limited liability companies (LLCs). Typically, the startup will have developed bylaws in which the process for dissolution is outlined. This will include the process required to be followed, as well as the requisite number of votes for approval.
Because corporations have shareholders, the dissolution process will often require the board of directors to draft and approve a resolution for dissolution. Thereafter, the resolution is voted upon by shareholders. LLCs do not follow the same formalities. However, with both entities, it is encouraged that the startup accurately record those resolutions approving the startup’s dissolution.
- Filing A Certificate of Dissolution with the Appropriate Agency
Upon dissolution, a startup will be required to file certain paperwork and documentation with the appropriate agency, typically the Secretary of State, in the State in which the startup is incorporated. A startup that has been authorized to do business in another state will also be required to file the same documentation in said states. It is imperative that the startup’s founders and/or registered agent review each applicable state’s procedures to ensure that all necessary steps are taken to file with the appropriate agency.
- All Tax Obligations Must be Fulfilled
Tax obligations must be taken care of prior to completing dissolution. Startups will be required to resolve any outstanding tax obligations with the IRS and any state or local agency.
- Providing Notice to Creditors
It is imperative that your startup’s creditors be given timely and sufficient notice of the dissolution. Failure to do so can expose founders/investors to personal and legal liability. The requirements for notice vary by state. A skilled and experienced Silicon Valley debtor & creditor attorney will be able to help your startup provide adequate notice to all creditors. There are many things in which a startup must include the following in the notice mailed to creditors, including some of the following:
- The startup has commenced the process of dissolution;
- The address to which creditors shall send any existing claim(s); and
- A reasonable deadline for submitting all claims, and that all claims received after the deadline will not be paid.
It is pertinent to note that some creditors may not be known to the business. Some states require that the startup provide notice in an appropriate public forum so that all unknown creditors may be put on notice as well.
- Creditors Claims Must Be Settled
The startup will be required to either accept or reject all creditor claims received. Accepted claims shall be paid out to creditors. Whenever a claim is rejected, written notice must be given to the creditor as to the reason for rejection.
- Distributing All Remaining Assets
Only after all claims are paid can the dissolving startup distribute remaining assets among its owners. It is important that the distribution of those remaining assets be done in a manner consistent with proportional ownership or another manner as designated in the startup’s governing documents.
Contact a Silicon Valley Business Attorney Today to Schedule Your Consultation
While it is not the goal of a startup to dissolve, it is a real possibility that a company may have to do so. Startup Company Counsel will work with your Silicon Valley startup business to ensure that your dissolution process is completed effectively, efficiently, and in compliance with all laws. Schedule your consultation with one of our experienced Silicon Valley business lawyers by calling our office at 408-441-7555.