The process of dissolving and terminating a Virginia limited liability company or corporation (each generically referred to in this article as an “entity”) can be a simple process, or it can be a time-consuming and complex process depending upon the surrounding facts and circumstances. When a business owner desires to close an entity, he or she can elect to formally dissolve and terminate the entity by making the appropriate filings with the State Corporation Commission (“SCC”), or an owner can simply let the entity “die on the vine” by not paying the SCC annual fee (in which event the SCC will automatically terminate the existence of the entity three (3) months following the due date for the annual fee).
Which option makes more sense? If the entity can be terminated by not paying the annual fee, then why go through the formal dissolution and termination process, which is more expensive and time consuming? One reason is that a formal dissolution and termination of the entity’s existence will result in receipt of an official certificate from the SCC documenting the closure of the entity. For internal record keeping purposes and tax reporting purposes, it is useful to have such a certificate on file. In cases where the owners mutually agree to wind down the business, and the business has no lingering debts or liabilities (e.g., no pending or threatened lawsuits), it makes economic sense to formally close the entity and pay the nominal filing fee. The paperwork is not complicated and the outcome is definitive. As small business owners know, there is a value in clarity and simplicity.
If the entity has debt, a formal dissolution and termination is advisable to reduce business owner risk even though it is a more complicated process. In Virginia, the failure to maintain an entity in good standing can create a legal basis for creditors of the entity to “pierce the corporate veil” of the entity and hold its owners and officers personally liable for debts of the entity. By formally dissolving and terminating the entity, the owners/officers reduce the risk that creditors will pursue that strategy. In a formal dissolution process conducted in accordance with applicable law, each creditor must be notified of the dissolution. This notification triggers an obligation on the part of each creditor to either take formal legal action or be barred from asserting a claim against the entity. This often results in creditors abandoning or reducing their claims, which may allow an otherwise insolvent company to avoid bankruptcy and formally terminate the entity’s existence.
For entities with multiple owners, the formal dissolution process also assures an orderly winding up of the affairs of the business and liquidation/distribution of any remaining assets to the owners. In some unfortunate situations, it becomes necessary to involve a court and close the entity through a judicial dissolution in which owners and creditors can participate. As a practical matter, this should be viewed as a last resort to resolve disputes between business owners or between an entity and its creditors. Like any litigation, judicial dissolution proceedings can be time consuming, expensive, and very distracting to business owners.
If you are ready to close out your Virginia small business, contact Perkins Law for assistance.