Contents
What Is Incorporation?
Where Should You Incorporate?
Operating as a Foreign Corporation
How to Choose and Protect Your Corporation Name
How to Choose a Corporation Type
How to Define a Stock Structure
How to Select Corporate Directors
How to Draft Your Articles of Incorporation
How to Write Your Bylaws
ID Numbers, Licenses, and Permits
How to Leave or Dissolve
Your Corporation
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How to Leave or Dissolve Your Corporation
As a corporation, you have certain legal obligations to fulfill if and when you end your business ownership. It helps to have an idea of where things might end even from the very beginning, when you’re first forming your corporation.
No matter how you leave your corporation, make sure to tie up loose ends. The exit strategies that business owners map out are as distinct as the entrepreneurs and advisors who think them up. A few options include:
- Passing the business on to a successor
- Selling the business
- Dissolving the business altogether
Succession Planning
Succession planning—making preparations to pass your business on to a successor—is no simple matter, especially if you want the company to thrive in your absence. The close mentorship of potential successors can teach them the nuts and bolts of company operations. Perhaps more important, it can pass on an appreciation for the values and other
intangible leadership principles that contribute to the success of a company. Some business experts say it takes at least three years to pass the baton correctly.
How to Choose a Successor
Choosing a good successor isn’t necessarily just a matter of picking the person who knows the business best or has spent the most time working in it with you. It’s about selecting the person who’s best equipped in terms of knowledge, expertise, personality, and vision to lead the organization in the future. Sometimes this means that your successor bears little resemblance to you. When choosing a successor:
- Identify the company’s goals: For instance, if you think it critical for the company to scale up to serve a global customer base, consider an open-minded successor with global work experience as opposed to someone who’s worked with you for 30 years but is resistant to change and new technology.
- Assess the person’s specific leadership qualities: Remember that ownership is different than management. Your top executive may be a stellar leader who’s able to set a strategic vision and motivate people to achieve it, but he or she may not have the risk tolerance to own the company.
- Don’t automatically look to your children: Passing the business on to a son or daughter is complicated because of generational, family, and other issues. It’s hard for you to assess your children’s future capabilities objectively, and personal matters sometimes unduly affect business decisions. Owners also have to figure out how to accommodate children who aren’t chosen to lead the business.
- Take financial issues into consideration: You’ll have to plan carefully to ensure that neither the company’s nor your personal financial health are negatively impacted during a business transfer. Your succession planning must ensure that you have sufficient assets to live on for the rest of your life and that the business has the liquidity it needs to prosper. Many entrepreneurs transfer ownership to an heir without financial consideration. Proceed with caution and seek professional advice: the sooner you start working through these issues with trusted advisors, the better.
Posthumous Succession
When a business transfer occurs after the owner dies, a slew of other complications arise. So work with a trusted estate planner, lawyer, financial planner, and accountant to make sure that your estate plan makes effective use of insurance, gifts, trusts, and family limited partnerships in the event of your death.
How to Sell Your Business
Selling your company may be the single largest financial transaction of your life. Once the contracts are signed, the sale is final, so you must be very attentive at each stage of the sales process and enlist the counsel of qualified advisors, including lawyers and small-business brokers. Unless you’re the company’s sole owner, dig up the shareholders’ agreement and follow its stipulations exactly. In general, the sales process includes:
- Setting a price
- Wooing buyers
- Negotiating sale terms
- Receiving a letter of intent
- Conducting due diligence
- Preparing a purchase agreement
- Meeting state requirements
How to Dissolve Your Business
Although it might be tempting to just close up shop one day and never reopen, you must take several specific legal
actions to officially dissolve, or end, your business. Corporations generally have perpetual life until dissolved by settling affairs, paying debts, distributing assets, and legally closing down. You’ll need to make an internal resolution that must be approved by the board and shareholders. You must also notify your home state and any states in which you operate as a foreign corporation.
State dissolution procedures vary, but in general, you must file articles of dissolution that include the corporation name, date of incorporation, date of dissolution, acknowledgement of shareholder’s approval of dissolution, and a note about creditor settlement.
Should You Dissolve Your Business?
If possible, avoid dissolution, as it can pierce a corporation’s liability protection. For example, if a company is voluntarily dissolved while it still owes creditors money, its shareholders may be held personally liable. Staying in business, selling, or passing on to an heir are preferable to dissolution.
Types of Dissolution
There are three types of dissolution, which differ based on who makes the final decision to dissolve the corporation.
- Voluntary dissolution: Occurs when the company’s management and/or shareholders decide it’s time to shut its doors, votes for dissolution at a meeting or by written consent, and files appropriate documentation with the state. The state then either approves or disapproves of the dissolution, depending on the company’s financial standing and whether or not it owes taxes.
- Administrative dissolution: Occurs when an authorized state official decides that a corporation has fallen exceedingly short of meeting its statutory requirements.
- Judicial dissolution: Occurs when a court cuts a business’s life short as it sees fit upon the request of shareholders, creditors, or a state attorney general.
Pay Your Debts
Going out of business doesn’t make you immune to the debts you accumulated while operating. You must give your creditors written notice of the dissolution and tell them where to address outstanding claims and by what date.
You also must prepare final tax returns and make sure that the IRS is satisfied before you can officially dissolve the business. Here’s a list of tax obligations from the IRS’s Closing a Business Checklist, which can be found online at www.irs.gov/businesses/:
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Make final federal tax deposits
- Electronic Federal Tax Paying System (EFTPS) or Form 8109-B
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File final quarterly or annual employment tax form
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 943, Employer’s Annual Tax Return for Agricultural Employees
- Form 943-A, Agricultural Employer’s Record of Federal Tax Liability
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Issue final wage and withholding information
to employees
- Form W-2, Wage and Tax Statement
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Report information from W-2s issued
- Form W-3, Transmittal of Income and Tax Statements
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File final tip income and allocated tips
information return
- Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips
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Report capital gains or losses
- Form 1040, U.S. Individual Income Tax Return
- Form 1065, U.S. Partnership Return of Income
- Form 1120 (Schedule D), Capital Gains and Losses
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Report partner’s/shareholder’s shares
- Form 1065 (Schedule K-1), Partner’s Share of Income, Credits, Deductions, etc.
- Form 1120S (Schedule K-1), Shareholder’s Share of Income, Credits, Deductions, etc.
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File final employee pension/benefit plan
- Form 5500, Annual Return/Report of Employee Benefit Plan
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Issue payment information to subcontractors
- Form 1099-MISC, Miscellaneous Income
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Report information from 1099s issued
- Form 1096, Annual Summary and Transmittal of U.S. Information Returns
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Report corporate dissolution or liquidation
- Form 966, Corporate Dissolution or Liquidation
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Consider allowing S corporation election to terminate
- Form 1120S, Instructions
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Report business asset sales
- Form 8594, Asset Acquisition Statement
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Report the sale or exchange of property used in your trade or business
- Form 4797, Sales of Business Property
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