How To Shutter Your Startup: Best Practices for Corporate Dissolution

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

Long-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).

Short-form dissolution

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

  1. 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.
  2. 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.
  3. 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.  
    1. If the dissolution involves the sale or exchange of corporate assets, Forms 8594 and 4797 might also be necessary.
    2. See the IRS checklist for other required filings.
  4. 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.  
    1. 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.
    2. If the company is registered to do business in another state, it will have to withdraw or surrender those qualifications.
  5. 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.
  6. “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:
    1. Settling and closing the business;
    2. Liquidating remaining corporate assets;
    3. Settling claims;
    4. Resolving any lawsuits;
    5. Making final distributions to creditors, and if funds remain, to applicable shareholders.
  7. 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.








Fail is on Sale (Comic)

#entrepreneurfail Cost Accounting

 

Trying is scary. 

When I first thought of a business idea many years ago, I brushed it aside.  I can’t afford to think about it, I thought.  If it didn’t succeed, I would have lost time, money, resources, dignity, promotion potential, and who knew what else.  What I didn’t realize is that not trying actually was digging the hole much deeper.

If you are worried about the cost of failure, you’re solving the wrong accounting problem.  Even though many flirt with the idea of starting a business, it is often too intimidating.

As Seth Godin said, “The tiny cost of failure …is dwarfed by the huge cost of not trying. This is news, a state of affairs due to the significant value of connection, to the power of ideas that spread and to the low cost of production. Delighting a few with an idea worth spreading is more valuable than ever before.”

So start trying. It’s the penny-wise thing to do.

This was originally created by Kriti Vichare for #entrepreneurfail: Startup Success.








Entrepreneur's Crossroads

#entrepreneurfail Road Less Taken

The road to success and the road to failure are almost exactly the same.  

— Colin R. Davis

This quote surprises many new entrepreneurs who assume that the only two options are success or failure. They don’t realize “success and failure” are actually one and the same path.  The only distinction is the road to success is much longer.

A friend recently shared a story of building a product for the wrong customer.  Eventually his team did pivot, and find a successful, sustainable business model, but it would not have been possible without first finding the wrong customer.  “It would have been easy to give up and assume we would never be on the right path”.

The added benefit is that new entrepreneurs can learn from the failures from other entrepreneurs, and the cycle continues.  This article helps us get an insight into famous entrepreneurs and their failures.

Let us know what road you took in the comments below, and if you experienced failure and success.

This was originally created by Kriti Vichare #entrepreneurfail: Startup Success.

 








The Role of an Entrepreneur…On a Business Card (Comic)

#entrepreneurfail Role of an entrepreneur in a Business Card

The Truth about the Role of an Entrepreneur

Scour the profiles across LinkedIn and you’ll be blinded by the countless “Entrepreneurs” and “CEOs”. Rummage through the business cards you collected at the last networking event and you’ll find an endless sea of “Founders”, and “Owners”.

While non-entrepreneur types may be impressed by these lofty titles, the rest of us can see right through you.  Those lovely euphemisms actually stand for “monkey”, “gopher”, “donkey” and various other creatures from the animal kingdom, and here’s why:

Monkey: Running around (sometimes aimlessly) fixing things

Gopher: Searching and fetching, then repeating the process

Beaver: Busy as one, sometimes biting off more than you can chew

Donkey:  Getting kicked around by investors and customers

So who do you pretend to be, and who are you actually?

 

Learning from my Business Card Mistakes

When I launched my own business I instantly printed business cards emblazoned with my self-appointed title. I might as well as written “your royal highness Excellency”.  I didn’t have a product but I had a shiny stack of glossy business cards declaring me as the head of the kingdom that didn’t exist yet.

What happened? Well within a couple of months, my logo changed, my website name changed, my company colors changed, and (gasp) yes my role changed. And here I was gazing at my pretty stack of unused business cards! I’m not committing that #entrepreneurfail again.

Alternatives to Business Cards?

I’m now here to overturn the conventional sport of printing and passing around business cards when you are just starting out.  Now introducing the MVP of a business card: No business card!  This is what I recommend:

  1. Everyone has a smart phone.  If you meet someone interesting, do the green thing and take a photo his or her biz card.  Email the person on the spot.
  2. If they don’t have a biz card, compose a blank email before you go your separate ways.  Ask them to fill out the To: field.  You should fill out the cc: field with your own email. The subject can say: “Nice to meet you today. Stay in touch.”
  3. If email isn’t your style, ensure you have the LinkedIn app on your phone. As you meet an interesting person, ask them if they are on LinkedIn and before you bid adieu send them a request as a contact.

Do you have business cards? What do they say? Do you find them useful? Let us know in the comments below.

This comic and post were originally created by Kriti Vichare for #entrepreneurfail: Startup Success.

 








Del fracaso al éxito en Perú

Arturo Calle es un emprendedor digital por naturaleza, y está involucrado en temas de Internet desde 1995. Se inició en las startups en 1999 creando un Canal de Televisión por Internet conocido como Alterlatina. Al caer la burbuja de Internet convirtió Alterlatina en una empresa de servicios con la cual impulsó el Streaming Media en Perú. Hoy trabaja con alumnos de la San Pablo en una startup llamada Suruna que utiliza Inteligencia Artificial para predecir el comportamiento del uso de videos.

Arturo Calle

Desde 2008 apoya activamente el emprendimiento habiendo auspiciado iniciativas como Lima Valley, Social Media Day y Blogday, entre otros.

Nos habla de su experiencia en la comunidad emprendedora de Perú y de cómo se puede sobrevivir al emprendimiento.

Cuestionando todo el proceso del emprendimiento después de que fracasara su primer startup, se dedicó a entender y ayudar a otros emprendedores a atravesar el proceso y así poder generar y fomentar la cultura emprendedora en el país.

Cree que si hubiera asistido a un Startup Weekend hubiera tenido claras algunas cosas desde el principio, y hubiera obtenido soporte de los mentores para no cometer los errores que tal vez por falta de conocimiento cometió. Tenía una razón personal y quería crear un ecosistema dinámico y real. Entendió después de casi 15 años cuáles son los factores para hacerlo:

1- Si no hay ecosistema, y existe ignorancia en el tema de emprendimiento es difícil formar startups, y en Perú, me di cuenta de que es un tema cultural. La educación del país sigue siendo de ‘vieja escuela’ y esperamos ser empleados en compañías multinacionales, especialmente fuera de la capital. Hay que implementar educación enfocada hacia el emprendimiento.

Se puede enseñar y estructurar mejor el conocimiento a los próximos emprendedores. Existen metodologías y recursos que ellos pueden utilizar para tener una mayor tasa de éxito en un tiempo más corto.

En las provincias y lugares menos privilegiados hay una sed de aprendizaje inmensa. Y se quiere replicar el modelo que funciona en la capital, sin analizar la problemática real de la localidad.

2 – En Perú hay un prejuicio alto acerca de la corrupción estatal, y en realidad el Estado está dispuesto a asociarse y a proveer apoyo a los emprendedores. Hay que averiguar y aprovechar las oportunidades que brindan organismos externos y buscar apoyo de inversionistas y aceleradoras de negocio.

3- He creado startups en diferentes momentos, en un principio lo hacía de una manera más ortodoxa, pero ahora lo que hago es estructurar y plantear la idea y el equipo de trabajo para llegar a una sinergia más completa. Se deben potenciar los startups que ataquen la problemática local y podrían permitir un desarrollo más enfocado a la comunidad, además de que la posibilidad de éxito es más alta.

Peru Community

Su consejo para los emprendedores de la comunidad Peruana es que no se desanimen, es difícil emprender en un montón de aspectos y hay que aprender a tener tolerancia ante el fracaso porque la posibilidad existe cada día, pero hay que ser perseverantes y seguir adelante con la idea, se deben tener grandes expectativas y tener claridad en el cambio de estrategias para llegar al punto de equilibrio y así llegar con más fuerza al éxito.

Si quieres más información del ecosistema emprendedor, o quieres participar en los eventos de la ciudad conéctate con Arturo en Twitter, @arturocalle

 








A Lesson On Failure…Bake Bread.

About a month ago, my other startup half quit. He wanted to find something more stable, and after a year and a half of working incredibly hard on USpin, I definitely empathized with him. Still, it left me in a bit of a lurch. In my personal life, I had finished my MBA at Northeastern, and Jackie was just about to launch into her MFA at BU. Like it or not, it was time for change, and my friend leaving was the last push.

As you can imagine, the lurch was tough to get out of. There were a lot of ends that needed tying, and even more that weren’t even able to be tied (for the moment), and as with all things – balance. Working 10+ hours every day for months on end has a profoundly stressful effect on people, and it was time for a break. But what is a non-technical founder to do?

The answer, of course, was to bake bread. For some reason, I gravitated to the kitchen to experience the catharsis that comes with creating (or at least trying to create) something delicious to enjoy and share. Not being one to shy away from a challenge, I was determined to make gluten-free vegan bread.

I was a little disappointed when the first loaf came out looking (and tasting) kind of like a flax-infused brick, but disappointment is not a deterrent. I learned from the brick. I embraced the brick. And then I made a better brick. And another one. And eventually, through repetition and research, I found myself making edible, delicious bread.

bread use

It takes a lot for me to get discouraged, and I can tell you that seeing my friend leave USpin definitely did the trick. But without his departure, there might have been no brick. There might have been no failure. There might have been no edible, delicious bread. But he did leave, and there was bread, and the adventure is continuing.

Go bake a brick, and then bake another. Eventually you’ll bake enough bricks to build something great, and you’ll learn from each terrible loaf in between.

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This was originally posted on Ethan’s Blog, which you can visit here.