March 4, 2018
So, you have decided to cease operations, close down your business, and begin the process of dissolving your entity. You know that there are formalities that must be attended to, but the what/when/how remains elusive. The first step is to identify if the entity is a corporation or a limited liability company. Notwithstanding some unique provisions of the Ohio Revised Code, and without discussing the process for nonprofit corporations, professional associations, or partnerships, the following is a general overview of the steps necessary to dissolve domestic corporations and limited liability companies in the State of Ohio.
Electing to Dissolve a Corporation:
A corporation may be dissolved voluntarily by the adoption of a resolution of dissolution by the directors or by the shareholders. The requirements for dissolving the corporation by resolution of the directors differ from those for dissolving the corporation by the shareholders.
Once a resolution of dissolution has been adopted, and after obtaining the necessary tax clearance, a Certificate of Dissolution shall be prepared, which must include pertinent information for dissolving the corporation. There are other notification requirements that must be met prior to filing the Certificate of Dissolution with the Ohio Secretary of State.
A corporation may also be dissolved judicially by either: (1) an order of the supreme court or a court of appeals or (2) an order of the court of common pleas in the county where the entity’s principal office is located. If this is the path your company is taking, the good news is that the relevant court will, purposefully or otherwise, identify the things that need to be accomplished in order to dissolve and wind up the affairs of your company. The bad news, of course, is that a court is ordering the dissolution of your entity and much of the process will be public record. If the dissolution occurs pursuant to the supreme court or court of appeals, then the court may either: (a) order the directors to effectuate the dissolution and wind up the entity in the same manner as would occur during a voluntary dissolution or (b) direct the relevant court of common pleas to effectuate the same. A court of common pleas may only order dissolution in an action brought by the shareholders, the directors, or the prosecuting attorney of the relevant county.
Regarding dissolution in a court of common pleas, if the action is brought by the shareholders, the court may only order dissolution if: (a) the articles have been canceled or the period of existence has expired, (b) the corporation is insolvent and dissolution is the only means through which to protect the creditors, or (c) the corporation has failed or is unable to meet its objectives. If the action is brought by the directors, the court may order dissolution if there is an even number of directors who are unable to break a deadlock or there is an uneven number of directors, but the shareholders are deadlocked on a vote to elect new directors. If the action is brought by the relevant prosecuting attorney, the court may order dissolution if it is found that the corporation was organized for, or otherwise engages in, activity including, but not limited to, the following: prostitution; gambling; loan sharking; drug abuse or illegal drug distribution; counterfeiting; obscenity; extortion; corruption of law enforcement offices or other public officers, officials, or any employees; or any other criminal activity.
Electing to Dissolve a Limited Liability Company:
The process of dissolving a multiple member limited liability company (“LLC”) is similar to dissolving a corporation. Regarding voluntary dissolutions, an LLC shall be dissolved upon the occurrence of any of the following: (1) the expiration of the period of existence as stated in the operating agreement or the articles of organization, (2) the occurrence of one or more events specified in the operating agreement as causing dissolution, (3) the unanimous written agreement of all members of the LLC, (4) the withdrawal of a member of the LLC unless otherwise stated in the operating agreement, or (5) a decree of judicial dissolution. A Certificate of Dissolution must be filed with the Ohio Secretary of State in order to effectuate the dissolution of the LLC.
Regarding tribunal dissolutions, a tribunal may declare an LLC dissolved and order the business to be wound up upon the occurrence of any of the following: (1) an event making it unlawful for all or most of the business to continue or (2) a determination by the tribunal that any of the following is or are true: (a) the economic purpose of the LLC is likely to be unreasonably frustrated, (2) a member of the LLC has engaged in conduct relating to the business that makes it not reasonably practicable to carry on business with such member, or (c) it is not otherwise practicable to carry on the business.
The process for dissolving a single member LLC differs from the above process for a multiple member LLC.
Voluntary Winding Up:
Once an entity voluntarily elects to dissolve and files a Certificate of Dissolution with the Ohio Secretary of State, the relevant parties are authorized to proceed with the winding up of the corporation/LLC. Winding up is the process of selling the assets of the business, paying off creditors, and distributing any remaining assets to the members or shareholders in accordance with Ohio law. This is separate and distinct from a judicial or tribunal dissolution, during which the court will control the process of winding up.
There are some minor distinctions between LLCs and corporations with regard to the winding up process, but they largely follow the same path.
It is important to note that dissolution is not a magic wand with which one may avoid company liabilities.
While the dissolution process may seem straight forward, you should always seek legal counsel to ensure the I’s are dotted and the T’s crossed.