By Shannon Liston, Techstars Corporate Council
Just to be clear: This sheet is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Companies should consult their own attorneys for legal advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal advice based on particular situations.
Sometimes, startups fail.
It’s painful and brutal—and nothing to be ashamed of. It’s part of many, many entrepreneurial journeys. But along with the emotional ups and downs, you’ve got to deal with the practical legal side of shutting down your startup.
The legal name for one version of this is corporate dissolution. If you don’t need the protections of bankruptcy (you’ve got low risk of litigation or disputes over claims), corporate dissolution may be right for your startup.
The Techstars legal team has created this best practices sheet to give you guidance and practical tips if your company is facing dissolution. Unsurprisingly, these will be different depending on which state you’re incorporated in—this sheet focuses on Delaware, because of the large number of US corporations incorporated there.
Long-Form v. Short-Form Dissolution
Many smaller companies liquidate without the protections of federal bankruptcy law, as corporate bankruptcy can be very expensive. Instead, you can get some of the same protections through Delaware’s long-form dissolution process—it gives boards of directors similar protections, and provides company creditors with notice, plus an opportunity to present their claims.
Work with your legal counsel to make sure you meet all the formalities of the long-form process, like 60-days notice to all known claimants, including public notice, and a court approval process ( 8 Del. C. 1953, § 280).
The formalities of the long-form process may be overkill for your company, especially if you’ve already sold your operating assets, if you stopped operations a while ago, or if you’re unlikely to have unknown creditors.
In this case, short-form dissolution may be right for you: it’s simpler and less expensive for many companies, and comes with fewer formalities than the long-form process (8 Del. C. 1953, § 275).
7 Steps to Dissolve a Business
- Obtain Board and Shareholder Approvals. Your company’s Board of Directors must approve the decision to dissolve and adopt a Plan of Liquidation. A majority of the company’s shareholders must also approve the decision and the Plan of Liquidation.
- Pay Franchise Taxes and File an Annual Report. You must pay Delaware franchise taxes in full (including the current calendar year franchise tax) and file all applicable Annual Franchise Tax Reports. The Delaware Division of Corporations will not accept the Certificate of Dissolution (see below) until this step is done.
- Notify the IRS. Within 30 days of the Board approving the dissolution (the dissolution resolution date), your company must file a notice of dissolution with the Internal Revenue Service: Form 966.
- If the dissolution involves the sale or exchange of corporate assets, Forms 8594 and 4797 might also be necessary.
- See the IRS checklist for other required filings.
- File for Dissolution with the State. Once the decision to dissolve is properly approved, the company must file a Certificate of Dissolution with the Delaware Division of Corporations.
- If your company has stopped doing business and doesn’t have any remaining assets, it might qualify to file the short form certificate of dissolution.
- If the company is registered to do business in another state, it will have to withdraw or surrender those qualifications.
- Provide Appropriate Notice to Creditors and Stakeholders. Follow state law requirements to give notice of the dissolution to anyone with a claim against the company. Delaware’s long-form dissolution notice requirements are here: 8 Del. C. 1953, § 280.
- “Winding Up”. After the dissolution is effective, the dissolved company is deemed to continue, generally for three years, for the limited purposes of winding up per the Plan of Liquidation. This means:
- Settling and closing the business;
- Liquidating remaining corporate assets;
- Settling claims;
- Resolving any lawsuits;
- Making final distributions to creditors, and if funds remain, to applicable shareholders.
- File Final Federal and State Tax Returns. Review the IRS checklist for closing a business and filing final returns. For the company’s final returns, check the box to indicate the tax return is a final return.
Do’s and Don’ts
Do: Act in accordance with your fiduciary duties.
It’s your responsibility to focus on maximizing the company’s value. For more on your obligations as a Director, see here.
Don’t: Disappear; act in a manner that presents a conflicting interest; arbitrarily pay back one creditor over another; etc.
Do: Send the filed Certificate of Dissolution to investors, describing your decision to dissolve and your efforts to maximize return to shareholders.
Don’t: Use dissolution as an escape hatch.
Dissolution alone does not abate actions, suits, or proceedings begun by or against your corporation prior to dissolution—or, generally speaking, for a period of three years after dissolution.
Do: Educate yourself on the several ways to wind down a company.
Talk with your lawyer about which way to wind down your company is the best choice for your situation—the complexity of your company (number of employees, investors, creditors, etc.) will have a big impact on this.