Legal definition of a dissolution of a business

Written by phil m. fowler
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Legal definition of a dissolution of a business
A business is dissolved when it no longer operates or owns any property. (Business image by Silke Wolff from

A business is a separate legal entity that is distinct from its owners, officers and managers. Just as a business can exist in one of several different forms, so also can a business dissolve in many different ways. The proper way to dissolve a business is to file paperwork with the state and federal government, but that doesn't always happen. In short, however, a business is dissolved when the business is no longer recognised under state law and no longer has any assets or conducts any activities.

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Formal Dissolution

Sometimes it is easy to tell when a business has been dissolved because the former business owners file the proper paperwork with the state and federal government. A business should file articles of dissolution with each state in which the business is licensed or authorised to do business. Additionally, the business should file final tax returns with the IRS. As a formal matter, a business is dissolved as soon as it properly files its articles of dissolution with the state in which the business is organised and existing.

Informal Dissolution

A business can also be dissolved by inactivity. Most state governments require businesses created and existing within that state to renew their active status each year. The business generally must pay a small fee to remain on the state's active business list. When a business does not reactivate by filing the necessary paperwork or paying the necessary fee each year then the business is considered dissolved. Of course, this is an imperfect system as many businesses neglect their renewal obligations but continue to operate anyway. This raises complicated questions regarding the validity of the business operations.

Sole Proprietorships

Not all businesses are formal entities created by filing paperwork with the state government. Many businesses are informal sole proprietorships that are owner-operated without any type of formal government recognition. These businesses can be dissolved just as easily as they were created, which essentially means the business dissolves whenever the owner stops operating the business. The former owner of a sole proprietorship remains potentially liable for any legal claims that people may have against the business.

Corporate Formalities

Corporations require a few extra steps before they can be legally dissolved. In general, a corporation is not legally dissolved until both the board of directors and the shareholders vote in favour of dissolving the corporation. When that happens, the corporate assets will be distributed to the various shareholders (owners) of the corporation. Of course, some corporations are not properly managed so they may legally dissolve even without formal approval by the directors or shareholders. Sometimes there is no clear action dissolving the business.

Chapter 7 Bankruptcy

One clear way to permanently dissolve a business is for the business to file Chapter 7 bankruptcy. In Chapter 7 bankruptcy a trustee will liquidate all of the business assets, pay off as many business debts as possible and then the bankruptcy court will declare the business legally and permanently dissolved. Chapter 7 bankruptcy is probably the most crystal clear way to tell that a business has been dissolved.

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