Unwinding a C Corporation When the Business Fails

Directors must vote to dissolve; otherwise, a failed C corporation still lives.

Directors must vote to dissolve; otherwise, a failed C corporation still lives.

C corporations are regular corporations treated as separate taxable entities by the IRS. For whatever reason a C corporation fails, the shareholders and managers must shut down the business operations then dissolve the corporation. If a C corporation is not officially dissolved, the corporation will continue to exist.

Corporations

Corporations are formed by filing articles of incorporation with the secretary of state. In most states the articles of incorporation must include specific information about the corporation including its name, principal business activity and shareholder and director names. Shareholders, or owners of a corporation, can be other corporations, individuals, LLPs and LLCs and they can be United States citizens, domestic entities or foreign citizens and entities. Your corporation is a legal entity separate from you and other shareholders with its own rights. Like you, it is treated as a “person”. Unlike you, a corporation exists into perpetuity unless its shareholders and directors dissolve it.

C Corporations

A C corporation is the name the Internal Revenue Service gives to corporations organized as regular for-profit corporations. The IRS treats C corporations as separate tax-paying entities. Your C corporation is therefore subject to double taxation. Your corporation pays taxes at the corporate level on its net income or loss and you and its other shareholders also pay taxes on any dividends or distributions you receive from your corporation.

Business Failure

When a business fails, it typically ceases operations and liquidates. Before your C corporation can shut down its business, its shareholders and directors must first vote to do so and create and sign a resolution documenting the decision. Alternatively, your board can record the decision to shut down in meeting minutes that are subsequently approved. To cease operations, your C corporation must then notify all stakeholders – employees, vendors, partners, lenders and customers. After settling with creditors, it may sell off all remaining assets to competitors, auction off its assets or simply distribute its remaining assets to shareholders.

C Corporation Dissolution

Because corporations are perpetual, your corporation’s shareholders and directors must also separately vote to dissolve the corporation after the business cessation process is completed. Sometimes corporations will remain alive for another year after shutting down its business to allow time to resolve any pending issues, known and unknown. Your board must create another resolution specifying its decision to dissolve the corporation or document this decision clearly in the meeting minutes. The board can specify immediate dissolution or dissolution at some future date. A corporate officer must file a dissolution request with the secretary of state and attach this documentation. Upon acceptance and after any specified time period has passed, the corporation will be officially dissolved.

Key Concepts

  • business fails
  • C corporation fails
  • C corporation failure

References