Dissolution

Understanding Dissolution

Dissolution happens in two phases:

1. Dissolving the entity – formally approving and filing the decision with the Delaware Secretary of State (or other applicable State).
2. Winding up – settling debts, distributing assets, and wrapping up business before the entity ceases to exist.

Until both stages are complete, the company continues to exist in a limited capacity and can still face claims. That’s why doing this properly matters.

Dissolving a Delaware Corporation

For corporations, the decision to dissolve generally requires:

• Board approval followed by stockholder approval, or
• Unanimous written consent of stockholders.

After approval, a Certificate of Dissolution must be filed with the Delaware Secretary of State. The company must also pay all outstanding franchise taxes before dissolution becomes effective.

Even after filing, the corporation technically continues for three years (or longer if extended by the Delaware Court of Chancery) for limited purposes like wrapping up business, selling assets, and defending claims.

When winding up, corporations can choose between:

• Safe harbor procedures – structured notices to creditors and court involvement, giving directors greater liability protection.
• Default procedures – less costly, but with greater risk that future claims may arise.

Choosing the right path depends on the business’s risk profile, asset levels, and whether there may be unknown or contingent claims.

Dissolving a Delaware LLC

LLCs follow a similar but distinct process. Dissolution can occur:

• On a date or event specified in the LLC agreement,
• By consent of members holding more than two-thirds of the interests (unless otherwise agreed), or
• When there are no members left in the company.

Once dissolution is triggered, the LLC enters winding up, during which managers or members:

• Pay or make reasonable provisions for creditors, including contingent and unknown claims.
• Distribute assets first to creditors, then to members according to their ownership interests.

The final step is filing a Certificate of Cancellation with the Delaware Secretary of State, which formally ends the LLC’s existence.

Why Proper Dissolution Matters

Failing to properly dissolve and wind up a company can leave lingering liabilities for founders and directors, complicate future ventures, and create tax headaches. Delaware law provides specific procedures to protect against these risks, but they must be followed carefully.

‍How long does it take to dissolve a Delaware company?
The filing with the Delaware Secretary of State is often processed within days (or faster with expedited service). However, the full winding-up process—paying creditors, resolving claims, and distributing assets—typically takes several weeks to months. Complex businesses or those with litigation can take longer.

Do I have to notify creditors when dissolving?
Yes. Delaware law requires corporations to either:

• Follow a safe harbor process with formal notice to known creditors and court approval, or
• Use a default process that still requires making reasonable provision for debts and claims.

LLCs must also make reasonable provision for creditors before distributing assets. Notifying creditors helps protect directors, managers, and members from personal liability

What happens if we don’t formally dissolve the company?
The company continues to exist and will still owe annual franchise taxes in Delaware. Failure to pay can lead to penalties, loss of good standing, and potential personal liability for owners. Proper dissolution ensures clean closure and avoids these risks.

Can a dissolved company still be sued?
Yes, for a limited time. Corporations continue for three years after dissolution (and sometimes longer by court order) to wind up and address claims. LLCs must make reasonable provision for known and unknown claims before cancellation. After those periods, liability protection is much stronger

Can we reverse a dissolution if we change our mind?
For LLCs, dissolution may sometimes be revoked by member vote before the final certificate of cancellation is filed. For corporations, the board can reserve the right to abandon a dissolution even after stockholder approval. Once the Secretary of State accepts the final filing, however, reinstatement options are very limited.

Do I still need to file taxes if my business is dissolving?
Yes. Delaware requires all franchise taxes to be paid through the month of dissolution, and the IRS requires a final federal return. Depending on your business, state income or sales tax filings may also be required.

What happens to leftover assets after dissolution?
After creditors are paid (or reasonable provision is made for them), remaining assets are distributed to stockholders (for corporations) or to members (for LLCs), usually in proportion to ownership.