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Corporate Dissolution and Shareholder Litigation

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Corporate Dissolution and Shareholder Litigation

Dissolving a business is a complex and often difficult process even in the best of circumstances.  When a disagreement arises or some wrongful action is taken by one party—whether that party is a shareholder, a partner, an investor, or another professional involved in the business dissolution—it can be difficult to protect your interests without the help of a competent business law attorney.

Our firm is experienced in handling cases involving corporate dissolution and shareholder litigation both in and out of court.  To protect and exercise your legal interests in a business case, please contact our qualified attorneys who can work with you to determine the best way to protect yourself and all that you have worked so hard for in the business world.

Read on to learn some of the ways an attorney would close your business so as to legally shield yourself from continuing liability.  You will also find information about corporate dissolution and shareholder dispute matters that may be handled through litigation.

Dissolving Your Business

Before dissolving a business, it is important to develop a comprehensive exit plan that will protect your interests and shield you from risks to your personal and professional assets, including yourself, your credit, and your reputation.

Five Steps to Dissolving your Business

1.  Vote to Dissolve the Business If your business is a joint venture involving other owners, partners or associates, you must come to an agreement over the dissolution of your business.  This agreement must be reached in accordance with:

a)      the procedures set forth in your company’s business documents OR

b)      state business laws

While the rules depend on the governing document, most require at least a majority vote, if not a 2/3rds or unanimous vote by all controlling parties.

Make sure this voting process is adequately documented and consent is made in writing.  If you are involved in a dispute over the business dissolution voting process, you may wish to contact a qualified attorney.
2. Dissolve the business through the government If you are dissolving a corporation or a limited liability company, you must officially dissolve the business with the government to avoid future business taxes and other liabilities.  While every state has different laws, most require that you submit an official dissolution form that details your company’s liabilities and debts, the distribution of company assets, and details about how you have elected to dissolve the business with all involved parties.

Notifying the government also alerts creditors that the business is no longer able to incur debts.

The IRS and state tax authorities also must be notified of your business dissolution.
3.  Cancel licenses, permits, and fictitious business names If you obtained any permit of license to operate your business you must make sure these are cancelled to protect yourself from fraudulent use of your business name or permits or other potential problems.

Moreover, if you used a fictitious business name, you should filed with your local county clerk’s office for official “abandonment” of the name.
4.  Cover all employee matters If you have employees, it is important that you notify them of the dissolution, deposit your final payroll taxes, and fall all employment tax paperwork in a timely manner.

If you are facing financial difficulties in employee related or other liability matters, it is a good idea to contact a business attorney as soon as possible to learn about your options and protect your interests.
5.  Inform parties of your business dissolution Typically, it is wise, if not essential, to inform numerous parties that your business is closed.  These include but are not limited to:

  • Employees
  • Banks and other financial institutions with which you have done business
  • Service providers such as utilities, cable, and internet providers, payroll services, tax preparation professionals, business insurance companies and more.
  • Lenders and creditors
  • Suppliers
  • Landlords
  • Customers

In addition to these important steps, it is imperative to provide for the collection of money owed to your business.  You will also want to carefully document all events related to the dissolution so as to be protected in the event of a dispute.

Now that you understand the basic steps necessary to dissolve your business, it is important to know the common problems that arise in this process.  Read on to learn more about common dissolution disputes.

Common dissolution disputes

Top 10 reasons for business dissolution in the US

1. lack of experience

2. inadequate capital

3. poor location

4. poor inventory management

5. over-investment in fixed assets

6. bad credit arrangements

7. personal use of business funds

8. unexpected growth

9. competition

10. low sales

(source: Small Business Administration)

When ownership of a business is shared equally between partners or shareholders, judicial dissolution or voluntary dissolution are available options in executing the business dissolution.  However, when ownership is unequal, minority shareholders or partners may find themselves in a vulnerable position.  They may suffer due to unequal monetary treatment (i.e. unfair compensation plans), denial of managerial participation (i.e. freeze outs), or other wrongful actions.

Oppressive conduct by majority shareholders/partners may be an actionable offense brought to court by injured minority shareholders seeking necessary recovery of financial or other losses caused by such unlawful conduct.

In addition to minority shareholder litigation, other shareholder litigation cases may also involve:

  • Fraud
  • Breach of fiduciary duty: often filed against officers or directories who fail to act in the interest of the injured party
  • Corporate waste
  • Breach of contract: business often involves numerous and complex contracts that must be honored through the dissolution of the business and the termination of the contract.
  • Usurpation of Corporation/Improper Advantage
  • Bankruptcy or other financial troubles

What To Do if You are Involved in a Dispute or Conflict

If you are involved in a conflict relating to shareholder issues or business dissolution, it is important to have a qualified and experienced attorney on your side to advise you of your legal rights and obligations.  This legal professional can also determine if you have an actionable case involving unfair business dissolution or corporate shareholder action.  Please contact us to learn more about how to protect your assets during the course of business dissolution.  Our qualified attorneys offer a confidential no-obligation consultation so that you can learn more about your rights and how to pursue the best course of action.