Consequences of not Properly Dissolving a Business

C Corporation

If your business structure is a corporation, then you filed for Articles of Incorporation through the Secretary of State’s office when you started the business. Just as you had to file paperwork to bring the business into existence, you will need to file the proper paperwork to shut the business down officially (cease operations). When dissolving a business, you need to file the Articles of Dissolution. This paperwork notifies the state the business is no longer in existence. Look at it this way, filing the Articles of Incorporation starts the corporation, and filing the Articles of dissolution ends the corporation. Failing to properly file the dissolution paperwork can have some serious consequences for the shareholders.

Following are considerations to keep in mind when exiting a business:

  • The legal requirements
  • Reporting Requirements
  • Tax Requirements
  • Continued Liability

Legal Requirements

The legal details relating to a dissolution vary from state to state. The corporation must follow the dissolution procedure in the state where the corporation was formed to establish an end date for obligations and liabilities. Closing the doors, selling off assets, and paying creditors does not mean the business is non-existent. Until Articles of Dissolution are filed with the state, the corporation technically remains in existence.  

Reporting Requirements

Until you officially dissolve the corporation, the corporation is required to comply with all state reporting requirements. Even though the corporation may be defunct, if you haven’t filed Articles of Dissolution, the corporation remains responsible for filing annual reports, if they are required by your state, as well as paying applicable annual fees or assessments.  Keep in mind that on top of reports, fees, and assessments that are due, the state will also assess late penalties and interest for failing to file. Until you file the Articles of Dissolution, and the state has accepted the filing, the state will continue to send delinquency notices for the overdue obligations.

Tax Requirements

Corporate tax returns (federal, state, and local) are due for any corporation that has not been properly dissolved, even if the business is no longer operational. Taxes, interest, and penalties are costly consequences for failing to properly dissolve the corporation by filing Articles of Dissolution. As mentioned, even if the corporation was defunct (no longer open or functioning) and had no income or expenses to report, if you have not filed Articles of Dissolution, penalties will likely be assessed.

Continued Liability

Continued liability is one of the most significant consequences of not properly dissolving your corporation. This is because until the corporation is officially dissolved, the corporation is still liable for past corporate actions. The filing of Articles of Dissolution sets deadlines for anyone who has a claim against your corporation. The Articles of Dissolution also determine a final date after which the shareholders no longer have to worry about third parties suing the company. Third parties can continue to take legal action against a corporation that has not filed Articles of Dissolution.

S Corporation

Without the approval of shareholders or the board of directors, you generally cannot dissolve a business with S Corp status.  Approval must come from shareholders and director resolutions, which must be recorded in official corporate records.  

Simply abandoning an S Corporation does not cause it to cease to exist. The shareholders remain liable for state and federal filings and tax obligations as long as the S Corporation has not been officially dissolved. The tax debts of the S Corporation incur penalties plus interest for each unmet deadline to file or pay. Filing Articles of Dissolution with the state is the only way for shareholders to protect themselves from accruing tax obligations.


For the most part, there are no tax consequences from dissolving a partnership. However, there may be consequences if the partnership is not dissolved. The partners will need to account for all properties involved in the business, as well as whether those properties have appreciated in value over time.

  • Some common events or circumstances that could lead to partnership dissolution include:
  • Death of a partner
  • Loss of profits
  • Illegal activities
  • Declaration of Bankruptcy
  • Violations of various business partnership laws
  • Changes to the business

The above list is not all-inclusive. Note that some limited partnerships may not dissolve automatically if a partner withdraws or dies.  

If the partners do not properly dissolve the partnership, each partner could still be held liable for the partnership’s obligations.  

To properly dissolve a partnership, do the following:

  • Review and follow your Partnership Agreement
  • Vote on dissolution and make sure the decision is documented
  • Send notifications and cancel business registrations
  • Pay outstanding debts, liquidate and distribute assets
  • File final tax return (Form 1065) and cancel tax accounts
  • Protect yourself from future liability by officially dissolving the partnership


After deciding to dissolve the LLC, as with other business structures, there are a few other steps that need to be followed. Those steps are following:

  • Vote to dissolve the LLC (members who decide to dissolve the LLC are taking part in what is referred to as a voluntary dissolution)
  • File your final tax return
  • File an Article of Dissolution
  • Settle outstanding debts
  • Distribute assets
  • Conduct other wind-down processes (such as paying final payroll taxes if you have employees, negotiating cancellations of contracts, and canceling business licenses and permits, industry memberships, etc.)

Just as with other business structures, if you do not properly dissolve the LLC, you will continue to be responsible for annual filings, taxes, penalties, interest, and other fees. In addition, the LLC can still be held liable in legal actions, until the LLC is officially dissolved. 

While some states only require the Board of Directors or shareholders to voluntarily approve the dissolution process, other states require a form be submitted to the Secretary of State’s office to be approved. To find out what the dissolution approval process is for your state, contact the Secretary of State office in your state. You will find the contact information for the Secretary of State office for each state at the following link.

Final Thought

As you now know, closing a business requires that you do your due diligence, make sure that all the proper steps have been followed for your business structure, and adhere to the state guidelines for dissolving the business. At this point, you might be a bit overwhelmed. If that is the case, no need to worry, ExitGuide can assist you with the exit process.