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Winding Down Doesn't Have to Mean Winding Up

There are times when the best thing an entrepreneur can do is to say "That's enough. It's time to stop operating this business." For some, the decision will entail passing the business reins over to a relative, a longstanding employee, or even a competitor. But for many, it will simply mean "closing up shop."

It seems simple enough: Start "winding down" operations by not taking on new business. Pick a date to stop picking up the phone. Tell the landlord that the lease won't be renewed. Provide notice to the employees, vendors and creditors. Maybe have a "Going Out Of Business" sale. Collect what's due. Pay what's owed. Put an "Out of Busines" sign on the door (or the company web-page). Set up a tee time for next Friday.

Some corporations' principals may even remember to call their bankers, insurers and accountants, and let them know that certain accounts can be closed, certain insurance policies may be cancelled (with tail coverage), and, "Oh yeah, please send a final tax return so we aren't bothered with any more of these ridiculous taxes which made us decide to go out of business in the first place." Hopefully, the corporate principal will also call the company attorney and advise the attorney that "It's time to dissolve." Wait, not so fast...

Dissolving a Pennsylvania corporation is at least as time consuming and expensive as forming a corporation. At a minimum, the following must be done:

--There must be written Consents by the Board of Directors (and, in many cases, the Shareholders) which authorize the corporation to go out of business and which provide to the corporate officers the authority to "wind down" the company's operations.

--Once the Consents are executed and safely ensconced in the corporate minute book, the officers must work with the corporation's accountant to file a Clearance Certificate Application with the Pennsylvania Department of Revenue and the Pennsylvania Department of Labor and Industry. It will generally take at least a few weeks, and in many cases, several months (yes, months), before those Clearance Certificates are received.

--During this waiting period, the corporation will be in "wind down" mode. This is the time to finalize contracts, make arrangements with customers, pay bills, collect monies owed, decide what to do with whatever company assets remain, make sure that money is set aside for claims and contingent liabilities, decide what to do about any fictitious names, make certain that any obligations which have been personally guaranteed are resolved, and take all steps to properly terminate or make other arrangements regarding retirement plans, benefit plans and employment obligations.

--The corporation's accountant will want to file final tax returns. The accountant will have to decide the best time to do this.

--Once all of the above tasks are completed (or almost completed) and the Clearance Certificates are received, the corporation's attorney can file Articles of Dissolution with the PA Bureau of Corporations and Charitable Institutions. Other filings may include a Termination, Amendment or Withdrawal of Fictitious Name Registration.

--Once the Bureau filings are completed, the dissolution must be advertised, the cost of which will be about the same as the cost of advertising the formation of the corporation.

Obviously, dissolution is a time consuming and somewhat expensive process. Can it be avoided? Yes! Many corporate decision-makers have found that, just because they wind down a business, they need not wind up, or dissolve, the corporation. Instead, the Directors execute a Consent document which states that the company will wind down business operations, but remain a corporation in good standing, while exploring other business options. There is no need for the filing of final tax returns. In many cases, there may be no need to file Clearance Certificate Applications. Though there may be employment obligations and plans which still need termination or adjustment, there may be interim steps available which would not be available with a dissolution.

Remaining as a corporation will require continued annual Shareholder and Director meetings, and the filing of tax returns. But the tax returns will be simple because of the lack of business, and the annual meeting Consents will generate minimal legal costs. Those costs will generally pale in comparison to the costs of the dissolution scenario, above. Moreover, by leaving the corporation in good standing, the principals will have the option to use the corporation to operate some other business in the future.

Leaving the corporation in place will not always be best, but all corporate principals should at least explore with their respective accountants, attorneys and advisors the various options before deciding to dissolve.

----Ken Milner