To achieve a successful “business divorce,” shareholders dissolving a closely-held New York corporation should strongly consider following the process prescribed by the New York Business Corporation Law (“NYBCL”). Here are five tips for handling the process effectively:
- Approving a plan of dissolution provides an orderly wind down of the corporation. A plan of dissolution defines the steps the directors will take to dissolve the corporation and liquidate all of its assets. By adopting a plan of dissolution, shareholders clarify directors’ authority to undertake specified actions, thereby assuring the directors’ authority to act. A plan of dissolution may be required to file IRS Form 966 and comply with applicable regulations.
- Complying with the safe harbor provisions set forth by the NYBCL allows a corporation to distribute assets to shareholders in an orderly fashion. Under NYBCL § 1007 a dissolved corporation can give notice to any potential claimant against it that any claim must be submitted to the address and by the date indicated in the notice. A person receiving the notice who fails to submit a claim timely will be barred from bringing that claim against the corporation or its shareholders.
- A plan of dissolution protects directors and shareholders from personal liability. Although there are multiple ways to dissolve a corporation, compliance with the dissolution process prescribed by the NYBCL avoids the risk of personal liability fort the corporation’s directors and shareholders for the corporation’s unsatisfied debts.
- The corporation may continue to operate after the certificate of dissolution has been filed. Although the dissolution of the corporation has been formalized by filing a certificate of dissolution with the Department of State, the process for winding up the corporation will likely continue after that filing. Shareholders cannot receive distributions of the corporation’s assets so long as corporate creditors remain unpaid.
- Check the corporation’s certificate of incorporation to know how to approve the corporation dissolution properly. Under New York law, there are certain default rules governing how many shareholders must approve a resolution to dissolve a corporation. However, since those default rules apply only if a corporation’s certificate of incorporation does not provide otherwise, shareholders should check that document. For example, the certificate of incorporation may establish that the corporation will dissolve automatically upon the occurrence of a specific event.
At Dunnington, Bartholow & Miller LLP we are ready to advise on the most appropriate and effective methods to dissolve a closely-held New York corporation.