Legal Speak

Many business endeavors may not turn out the way the ever-hopeful entrepreneur originally envisioned.  The U.S. Small Business Administration has stated that, “seven out of ten new employer firms survive at least two years, half at least five years, a third at least ten years, and a quarter stay in business fifteen years or more.”[1]  This article is dedicated to what one must do from a legal standpoint when they are ready to close up shop.

As a general rule, when going out of business, it is important from a legal and tax perspective to formerly dissolve your business entity and file all necessary federal and state tax returns.  Effectively dissolving your entity allows the statute of limitations for legal and/or regulatory claims to begin to run.  What does this mean to the prior business owner?  For example, for a Nevada corporation or limited liability company, it means that after two (2) years from dissolution of your business, your old company can properly raise a statute of limitation defense.  The statute of limitation will vary pertaining to the state in which the entity was created.  Remember, sometimes it takes time for litigants to realize that they may have a legal claim against your company.  This could mean years after your business is closed, a legal claim against the company arises.  You only have to worry about this issue for two years, if you properly dissolve the entity.  Nothing can be worse than having your business not succeed and to add insult to injury, later become embroiled in lengthy and expensive litigation pertaining to that business.

Another important matter to consider is that an owner of a revoked entity that is not appropriately dissolved may be opening themselves up to potential personal liability.  In Nevada, a defaulted company has its charter revoked.  It could be argued that without the active charter the owners have lost their shield of liability protection that the active entity provides.  Remember, one of the main reasons for forming a corporation or limited liability company is to obtain that “corporate or LLC shield” that protects the owner from being personally liable or responsible for the company’s debts, fines, and penalties.  It is silly to throw this protection away by not tending to last minute details.

Lastly, a very disconcerting point to mention is that many States, and now even the federal government, are teetering on the brink of a fiscal default or bankruptcy, which has left them scrambling for new ways to obtain necessary revenue.  A company in default or revoked status is still considered to be in existence and is obligated to file annual lists, pay annual fees and, depending on the State, minimum annual franchise taxes, even if they conduct no business.  The third reason to officially dissolve the entity is to cut off the filing and tax obligations the company may incur by simple virtue of its existence.  For example the State of California will continue to assess a company its minimum annual business franchise tax of near or around $800 per month, even if the business has technically “closed” and is not conducting any business to date.  Nothing is worse than having to go back to a State taxing authority, especially one that is notoriously struggling for revenue, and beg for forgiveness at a later date.

If you are interested in closing up shop, it is important to take the necessary legal and tax steps to make sure you do not experience any unnecessary headaches or expenses moving forward.  Contact a legal professional to make sure you have complied with proper procedures under statute for dissolution of your entity and speak with your accountant to make sure all final state and tax filings are timely submitted.

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