What’s the best way to dissolve a company?

QUESTION:

I started up a company but it didn’t take off, so we moved on to another company that’s doing well. Now I want to dissolve the older company, but it still contains assets, like computers and intellectual property, and multiple people have claim to those assets. What’s the best way to dissolve a company in this situation? Also, what happens if my partners don’t want to dissolve? What should I do then?

ANSWER:

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.

Unfortunately, there’s no quick answer to this question. I’ll give a few general points, but you need to go to a lawyer to figure out what to do and then get it done. It would be foolish to try to do this on your own. That said, there’s no reason the company or a participant with little economic interest in the outcome (e.g. a CEO who holds a few shares of common stock) should bear the legal costs. If there’s not a lot of assets around and one claimant has a prior right to most or all of them, for example, it would make sense for that claimant to hire a lawyer to come up with a plan and present it to the others.

Depending on the type of “company” (a California corporation, a Delaware LLC etc.) different sets of rules apply to dissolution. Each state and each entity type has its own procedures. Often, there are several different options for one kind of entity. There are similarities, but not enough to make generalization helpful. If there are assets and claimants, you’ll need to go through the appropriate state procedure. Depending on the state and the circumstances, dissolution can take several years to finish (mostly waiting for time to pass, not doing things).

If the liabilities exceed the assets (or close to it), bankruptcy is also a possibility. Bankruptcy can simplify dissolution for an insolvent entity by imposing a final resolution of all claims. Bankruptcy can also be an incredible money sink, however, so you need to seek expert advice before going that way.

It’s also often a good idea to sell the illiquid assets (equipment, IP etc.) before you dissolve. Reducing everything to cash makes it easier to divvy up the assets. It can also avoid fights over valuation, assuming everyone thinks the sale was fair. Ideally, it would be best to sell to a third party, but sometimes one of the claimants knows the assets better and can offer more for them, either in cash or settlement of claims. If you sell to a claimant, you want to be very careful to do it in a way that won’t be subject to challenge by other claimants. If you’re going to go through bankruptcy, it’s almost always better to wait and do the sales as part of the bankruptcy procedure.

However you proceed, it’s best to reach agreement with as many claimants as possible (preferably all) before doing anything in court. If the parties really can’t agree or if there are significant unreachable claimants (e.g. people who might have a personal injury or warranty claim in the future), a combination of corporate governance mechanisms and court procedures should be able to resolve everything, but courts are inefficient. They’re slow, they allow lots of people lots of opportunities to object and appeal, and (in a contested proceeding) they require everyone to lawyer up and start paying fees. So it’s better to go to reach agreement and then go to court only to get an official imprimatur on your agreed resolution.