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What are the causes and perils of involuntary dissolution?

Facing involuntary dissolution from the state

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Do you know that involuntary dissolution is the process whereby a state authority terminates a company’s charter? Failure to pay taxes, engaging in illegal activity, or violating state law are common causes.

The process is pricey and disruptive, but we’ll discuss ways to minimize the impact. We’ll explore the causes and perils of termination, and provide tips on how to avoid it. Let’s get started.

What is Involuntary Dissolution 

When businesses can no longer come to an agreement, a “business divorce” becomes necessary. It involves the forced sale of the company as prescribed by court orders stemming from disputes between partners.

Ultimately it comes down to dissolving and parting ways where there is simply no reconcilable solution.

Companies that can’t meet basic obligations and legal requirements might face involuntary termination. It often occurs when a registered agent resigns or declares bankruptcy. It can also happen if there’s an unfortunate consequence of fraud convictions on the directors or not filing taxes or reports on time. 

The court might step in to protect shareholders’ investments by ordering this kind of forceful dissolution from either state secretaries or creditors themselves.

What are the major causes of involuntary dissolution?

The reasons for dissolving a partnership are far-reaching. The three primary causes includes the following:

  • Failure to Submit annual or biennial report to the Secretary of State

Many states will swiftly revoke a business entity if it misses any filing deadlines. For instance, Missouri allows just thirty days past the due date before its revocation proceedings begin.

On the other end of the spectrum is Connecticut, which does not issue revocations for missing reports. If your paperworks are up to date, you might get some pardon for late filing of reports once in a while.

  • Failure of the entity to file required tax returns or pay state taxes with the state tax department. 

Failure to fulfill your tax obligations could have serious consequences, depending on your residence. It could include revoking your professional certificate like an accountant’s license. It’s the same in California, Missouri, New Jersey, and New York where non-compliance can lead to the suspension of certificates.

  • Failure of an entity to maintain a registered agent and/or office. 

An organization’s representative departing for reasons involving nonpayment is one of the common causes of dissolution of partnership business. 

The globalization of business operations provides a myriad of opportunities for organizations to expand. But finding a replacement can become challenging. 

Failure to fill the void often backfires. It results in abandoning foreign registrations or dissolving subsidiary companies. 

Consequences of involuntary dissolution

Deciding to dissolve a business comes with potential consequences. They include the following:

  • Unresolved business entities can be a major roadblock if you’re seeking bank loans or contracts. To avoid frustrating delays when you apply for loans, make sure to completely dissolve your company.
  • Taxes in many states often continue to accrue even after a business shuts down operations. It’s best to pay any accrued taxes before formally dissolving to avoid potential liabilities.
  • The entity is at risk of litigation, making it almost impossible to stand up for itself in court. Their ability to mount a defense against claims has been severely compromised by the revocation.
  • Fraudsters are taking advantage of a misleading compliance loophole, accessing revoked entities and using them for shady operations. Without the owner’s knowledge or consent, these perpetrators use dormant companies to deceive businesses with their illicit activities. 

Taking control of long-standing organizations can give crooks an extra edge in trying to skirt regulations – but it won’t last forever!

How To Avoid Involuntary Dissolution

If a business is subject to involuntary dissolution, their assets may be sold off in part or as an entire entity. The court will declare the company dissolved after liquidation has been completed. 

Majority shareholders can buy out the minorities before dissolution. It allows potential closure through other means instead of terminating entirely. It can also help preserve different aspects of continuity under new ownership.

How to Avoid Involuntary Dissolution?

Dissolving a company doesn’t happen overnight, instead, it’s due to improper maintenance or fraudulent behavior. 

To protect the stability of your business, be sure you’re up-to-date on all legal requirements and financial obligations. Otherwise, the state may shut down your operations for good via quo warranto proceedings or court order.

Hold annual meetings to discuss financials such as accurate records and timely income statements. Additionally, filing of essential yearly reports is a necessity for optimal management.

If your company finds itself in a state of insolvency, start fresh by refinancing or liquidating assets. If there’s a legal action or court-ordered dissolution follows, provide proof of financial stability to prevent recurrence. 

This could mean providing documentation showing settled debts to prevent risk of future proceedings. 

Also, keep shareholders to date about the current developments. It’s best to take proactive steps covering all bases and keep a united front.

In Conclusion

Involuntary dissolution can be a death sentence for businesses, but you can prevent it. Maintaining healthy finances and following all legal requirements is key to avoiding this fate.

About Author

Picture of Rick Mak

Rick Mak

Rick Mak is a 30-year veteran businessman, having started, bought, and/or sold more than a dozen companies. He has bachelor's degrees in International Business, Finance, and Economics, with masters in both Entrepreneurship and International Law. He has spoken at hundreds of conferences around the world during his career on entrepreneurship, international tax law, asset protection, and company structure. Business Anywhere Editorial Guidelines

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