Should a Virginia company formally dissolve and terminate when it is going out of business?

The process of dissolving and terminating a Virginia corporation or a Virginia limited liability company (each generically referred to in this article as an “entity”) was discussed in the January edition of this newsletter. As stated in that article, when a business owner desires to close an entity, he or she can elect to formally dissolve and terminate the entity, or simply fail to pay the annual fee owed to the State Corporation Commission (SCC) (in which event the SCC will automatically terminate the existence of the entity three (3) months after the final due date for the annual fee).

Clients often ask us : If the entity can simply be terminated by non-payment of the annual fee, 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 will result in receipt of an official Certificate from the SCC documenting the closure of the entity. For internal recordkeeping purposes and tax reporting purposes, it is useful to have such a Certificate on file. In cases where the owners agree to close the entity, and the entity has no debt, it makes economic sense to formally close the entity and pay the nominal filing fee. In such event, the entity can accomplish the termination in a single filing.

If the entity has debt, a formal dissolution and termination is a more complicated process, but is also recommended for business owners. 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 likelihood that creditors will attempt to do so. In the formal dissolution process, each creditor must be notified of the dissolution, which will trigger an obligation on the part of each creditor to take legal action or else 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 cases, it is necessary to involve the court and close the entity through a “judicial dissolution” in which owners and creditors can participate. This is often a last resort to resolve disputes between business owners. For example, one owner may petition the court for dissolution in order to prevent another owner from incurring additional debt or entering into contractual obligations on behalf of the entity. In rare cases, a creditor may force a judicial dissolution of the entity by filing a dissolution petition with the court