Closing a business in Massachusetts can be very difficult to do – emotionally, logistically, and legally. If not done properly, the business' former owners and other stakeholders can find themselves in serious legal trouble.
Over four decades, the business lawyers at the Katz Law Group have helped numerous businesses and corporations – both large and small – navigate this complicated juncture in the life of the company.
Why Dissolve a Business?
Broadly speaking, there are three different reasons why businesses close down, or dissolve:
- Voluntary dissolution
- Involuntary dissolution
- Administrative dissolution
In a voluntary dissolution, owners and stakeholders shut down the business because they choose to do so. This can be for good reasons, like the owners want to retire, or for bad reasons, like if the business is not making enough money.
Involuntary dissolutions happen when the owner and stakeholders are forced to shut down the business by outside forces. Examples of an involuntary dissolution are when the business becomes insolvent and a bankruptcy court shuts it down, or when a court orders the business to dissolve in a partner dispute.
An administrative dissolution is a type of involuntary dissolution, where the business is shut down by the government for not complying with regulations.
Note that these are all when a business shuts down, not when the owners sell the business. A sale transfers the business to the buyer. A dissolution terminates the business entirely.
The Dissolution Process in Massachusetts
The specific process for dissolving a business in Massachusetts will depend on whether it is voluntary, involuntary, or administrative, as well as on what type of corporation the business is structured. However, after the company's ownership and stakeholders come to the decision to dissolve their business, it generally goes through the following steps.
1. File Articles of Dissolution
The first step is to file the Articles of Dissolution with the Massachusetts Secretary of the Commonwealth. This informs the state government that the business is closing down and will cease to function after the state specified. If your company was engaged in business in other states as well as in Massachusetts, you may have to file similar Articles in those other states.
Failing to take this step will mean that the legal and corporate obligations of the company will continue, and that the company will likely become noncompliant and subject to sanctions, fees, or other penalties.
Massachusetts corporations voluntarily dissolving would file the Articles of Dissolution with Form PC (Certificate of Dissolution by Voluntary Action). Limited liability companies (LLCs) file Form LLC-105 (Certificate of Cancellation). These forms require information about the dissolution, including its effective date, the reason for it, and proof that the dissolution is happening according to the company's bylaws.
2. Notify Creditors
The dissolving company then has to notify any person or entity that it is indebted to, inform them of the business' pending termination, and giving them a reasonable deadline for submitting their claims.
3. Liquidate Assets
The company can then go through the process of liquidating their remaining assets to cover their outstanding financial liabilities. For businesses with lots of inventory, like retail shops, this generally means having a “going out of business sale,” while companies that provide a service generally sell off their capital assets. Transparency during this process is important, particularly if there is a chance that not all of the company's creditors will be paid in full – it is not uncommon for unsatisfied creditors to argue that the liquidation could have gotten more, or that the dissolving company deliberately undervalued its assets to either commit some self-dealing or to stiff its creditors.
Unfortunately, these liquidation sales rarely fetch market value for what is sold. Company owners who are considering a dissolution need to be aware that they will probably be disappointed by what they receive.
4. Satisfy Liabilities
Once the assets are sold, the company's liabilities must be satisfied. The claims that the creditors have made against the company have to be paid off or otherwise resolved.
5. Distribute Remaining Assets
Finally, only after all of the company's debts are paid off, the dissolving business can pay its ownership whatever remains from the liquidation and the company's accounts. Who gets paid how much is generally resolved in the company's bylaws or operating agreement or, if it is not, according to Massachusetts state corporate law.
3 Big Legal Issues to Navigate
Throughout this process, there are three major legal issues that you will have to navigate carefully:
- Legal or contractual duties
- Employees
- Taxes
First, the company has to honor any contracts that it is a party to, up to the point of its termination. This includes things like:
- The commercial lease
- Subscription services
- Purchase agreements
Depending on the nature and size of your business, it can include dozens of other contracts, as well. Just finding all of the contractual obligations that your company has to uphold can be difficult to do. To make matters worse, these other parties are going to be aggressive about upholding their rights and interests: Contract disputes with closing businesses are very common.
Second, the company's employees must be managed while the business dissolves around them. This can be a very sensitive issue, as many employees will have to find new jobs once the company closes. However, just like with the company's other contracts, employment contract disputes are common at the end of a company's lifetime.
Finally, the state and federal government are going to make things very difficult if there are any taxes owed by the company or corporation, and are unlikely to allow for a dissolution until everything is paid.
Call the Massachusetts Business Lawyers at the Katz Law Group for Help in Dissolving Your Business
Winding down a business in Massachusetts is a sensitive and complicated endeavor. The small business lawyers at the Katz Law Group have four decades of experience doing it. Contact them online or call their central Massachusetts law office for the guidance that you need to do it the right way.