The existence of a corporation patterns after the cycle of life. They are "born" (they are formed by a filing with the Secretary of the Commonwealth), they "live" (they conduct and carry on business) and eventually "die" (some fortunate ones have the luxury of "cheating death" by merging, but most small- and medium-sized corporations cease to exist through dissolution). Although it is prudent to have an attorney involved in all cycles of corporation's existence, it is especially important at its termination.
Generally, termination of a Massachusetts corporation involves three steps (usually in the following order): dissolution, winding-up, and liquidation. A corporation remains in existence following dissolution, but only for the purposes of winding-up its affairs and liquidating. "Winding-up" is the time in which the corporation collects its assets, discharges liabilities and conducts other acts necessary to finalize its affairs. Lastly, liquidation occurs when the corporation distributes its remaining assets to the shareholder(s).
A corporation can be dissolved in one of three ways: judicial dissolution; administrative dissolution; or voluntary dissolution. This article will focus on administrative dissolution and voluntary dissolution. Judicial dissolution is a rarity and usually comes about when a corporation's board of directors is deadlocked and one or more principals seek judicial intervention. Regardless of the form of dissolution, a company must go through the winding-up and liquidation phases. The complexity of winding-up and liquidation will vary greatly depending upon the amount and character of assets to be distributed and liabilities to be discharged.
Administrative Dissolution
The Secretary of State may administratively dissolve a Massachusetts corporation for failure to file its annual reports or pay its taxes for two consecutive years. The Secretary of State is required to notify the corporation of the administrative dissolution. An administratively dissolved corporation may seek reinstatement by curing the circumstances that led to the dissolution, paying any outstanding corporate excise taxes and related interest or penalties, and filing an application for reinstatement with the Secretary of State.
If a corporation allows it to be administratively dissolved, the Secretary of State generally does not seek to collect the annual report fees and late fees leading up to the administrative dissolution. Of course, the corporation must pay other taxes and fees that are due and owed to the Massachusetts Department of Revenue, (the "MA DOR"), and other governmental agencies, if any.
Administrative dissolution is the simplest and most passive process, but it takes longer than a voluntary dissolution. If a corporation has minimal assets to distribute and minimal outstanding liabilities (contingent or otherwise), administrative dissolution may be an attractive low-cost alternative to voluntary dissolution because it requires limited action by the corporation and may not require the payment of delinquent annual report fees. A corporation cannot predict, however, how quickly the Secretary of State will undertake dissolution proceedings. If there is a need for dissolution to be effected within a particular time; or if a corporation has significant assets to be distributed or substantial actual or potential liabilities; then the corporation should follow the voluntary dissolution procedure outlined below.
Voluntary Dissolution
Unless its articles of organization or bylaws provide otherwise, a Massachusetts corporation may voluntarily dissolve with the affirmative vote of the majority of its board of directors and two thirds of its shareholders. Unlike an administrative dissolution, the corporation must prepare and file Articles of Dissolution, file all annual reports owed by the company for the last ten years and pay all fees in connection with filing those reports, and take other steps that will likely incur legal fees and other costs.
Voluntary or administrative dissolution of a Massachusetts corporation does not automatically terminate any qualifications the corporation may have obtained to do business in other states. Although these qualifications will typically lapse if the corporation fails to make annual filings with the relevant states, a corporation that wishes to demonstrate that it has definitively ceased operations in all states will need to separately terminate its qualifications.
As mentioned previously, whether the company chooses voluntary dissolution or administrative dissolution, it must wind up its affairs and liquidate. The complexity of each step depends on the character and significance of the assets to be distributed and/or the liabilities outstanding.
Winding Up
In the winding-up phase, the corporation collects its assets, disposes of its properties, discharges or makes provisions for the discharge of its liabilities and does all other acts necessary to wind up its business and affairs. As part of the winding-up process, the board of directors should adopt a formal plan of dissolution and liquidation, which will describe in general terms the steps the corporation will take as well as a timetable for completion of the process.
During the winding-up process, the corporation should identify its known liabilities and either pay them off or establish a reserve fund to pay them when they become due. A corporation should pay particular attention to the satisfaction of tax and payroll obligations, as these liabilities, if not paid, can give rise to personal liability for officers and directors.
If there are significant disputed, contingent or potential claims that could arise after dissolution, the corporation may wish to follow the statutory notice procedure under Massachusetts law that establishes a limited time period for making claims against a dissolved corporation. This procedure involves notifying known claimants of the dissolution and the procedure for settling those liabilities, as well as providing notice to "unknown claimants" by publishing notice of dissolution, including contact information for making a claim, in a newspaper of general circulation and on the corporation's website, if it has one. Following this procedure will limit the liability of the corporation's directors and stockholders for future claims against the corporation.
Liquidation
The last step is liquidation of the corporation's assets. In the liquidation phase, the remaining assets, if any, of the corporation are distributed to the shareholder(s) in accordance with the articles of organization and the plan of dissolution adopted by the board. While a corporation may liquidate its assets at any time, there are tax implications for doing so (different from those in the context of a dissolution) and liquidation in and of itself does not terminate the existence of a corporation.
We generally recommend that a corporation obtain a clearance letter from the MA DOR to ensure that all taxes have been paid to date before making liquidating distribution(s) to its shareholder(s). To the extent, a corporation has distributed assets without paying all necessary taxes; the Commonwealth may seek recovery from shareholder(s) personally.
Under Massachusetts law, subject to the limitations set forth above, shareholders of a corporation are subject to the liabilities of the corporation only to the extent of any distributions made to them. Therefore, if a shareholder receives little or no distributions from the company, his or her risk is limited to those distributions, if any. The board, in consultation with the company's attorney, will assess the likelihood of claims against the corporation. In some cases, the board may choose to maintain a separate reserve account for unknown claims for at least three years after dissolution. Alternatively, the board may obtain an insurance policy in an appropriate amount to cover shareholders individually for a period after dissolution.
Conclusion
The decision about how to dissolve a corporation can be complicated. To the extent that a company has limited assets to distribute and few liabilities, administrative dissolution may be the best choice. On the other hand, a voluntary dissolution would be a prudent choice if the company has either significant assets or contingent liabilities, or if the company wants to control when the dissolution takes place. The board of directors should consult with experienced legal counsel to determine the most appropriate course of action under the circumstances.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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