Whether it is time to retire, sell a business or simply close its doors, there are steps that must be taken to comply with Ohio law. Ohio Revised Code § 1701.86 provides the framework for voluntarily dissolving a corporation. It lists the notices and certificates required by the State.
However, another essential part of dissolving a corporation is winding up its affairs, including:
- Wrapping up all remaining business
- Paying debts
- Distributing assets
Ohio Revised Code § 1701.88(A) states that the corporation shall cease to carry on business and shall do only such acts as are required to wind up its affairs, or to obtain reinstatement of the articles. (Other states have comparable laws.1)
What Corporate Acts Are Considered Part of this “Winding Up” Process?
Ohio Revised Code § 1701.88(D) identifies the entire spectrum of actions (D)(14) which specifically requires officers of a dissolving corporation to “apply the assets to the payment of obligations.” Obligations include both secured and unsecured claims, such as employee salaries, facility rentals, equipment leases, utility bills and, most importantly, taxes.
An important part of winding up is notifying creditors of the dissolution. Ohio Revised Code § 1701.87 requires public notice of voluntary dissolution to any known creditor and any person that has a claim (conditional, unmatured or contingent) against the dissolving corporation. Notices must include a mailing address for submitting claims and a deadline for doing so. It is very important that creditors place a claim with the dissolving corporation within the stated time period or their claim will be barred.2
What Happens If There Are Insufficient Assets to Pay Creditors?
Typically, secured creditors will recoup the most because their claims are secured by real estate, equipment or other assets. A secured creditor can simply assert its rights against the secured collateral. This can take the form of a:
- Real estate foreclosure
- Repossession of vehicles or equipment
- Court-appointed receiver to take control of business operations and divert all assets to the primary secured creditor
However, unsecured creditors may be left with little or nothing after secured claims are paid. If there are assets remaining after paying secured creditors, the corporation may offer pro rata payments to unsecured creditors. In this situation, the corporation will analyze its remaining credit claims and offer to pay a certain percentage. The corporate officers, or an attorney, will offer this pro rata settlement by letter with instructions on how to respond.
Many times, the offer of pro rata payments must be accepted by all creditors for the offer to be effective. Creditors are not obligated to accept the offer, but any offer should be weighed against the likelihood of successful collection action against the dissolving corporation. Creditors that opt out of the pro rata offer most likely will need to proceed with a lawsuit and obtain a judgment to collect.
What About Tax Liabilities?
While a corporation is not required to liquidate all claims completely in order to successfully wrap up affairs, all taxes must be paid and all tax returns must be filed.
Ohio Revised Code § 1701.86(H)(2) requires that domestic for-profit corporations first obtain a Certificate of Tax Clearance from the Department of Taxation in order to voluntarily dissolve and file a Certificate of Dissolution (Form 561) with the Secretary of State.
To obtain the Certificate of Tax Clearance, corporate taxpayers must submit Form D5 “Notification of Dissolution or Surrender” to the Department of Taxation after all applicable final returns are filed. The Department will then review all tax accounts associated with the corporation to determine if there are any outstanding tax liabilities or filings. All outstanding tax liabilities and filings need to be paid and/or completed before a Certificate of Tax Clearance will be issued. In addition, all business entities must close their accounts with the Ohio Department of Taxation to avoid further billing and assessments that would impede dissolution.
Dissolving a corporation requires more than just taking down your shingle and moving to greener pastures. The law provides a framework for how affairs must be wrapped up. Failure to follow these guidelines can lead to personal liability for corporate officers, further tax liability and more. If you want to properly wrap up your business, marshal your remaining assets and pay the bills.
1 N.J. State. Ann § 14A:12-9(1); §351.486 R.S. Mo.; Va. Code Ann. § 13.1-752; Utah Code Ann § 16-10a-1405; (5) Tex Tax Code § 171.255; 805 ILCS 5/3.20; KRS § 27113.14-050; Fla. Stat. § 607.1421; Mont. Code. Anno. § 35-1-935.
2 Ohio Revised Code § 1701.87(D).
