Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it's imperative to take all of the proper steps to avoid unforeseen liability and minimize potential tax implications, including capital gains tax business sale consequences. Ideally, this should be done in consultation with an experienced corporate attorney.
Because the corporation dissolution process can seem daunting, this article provides an overview of how to dissolve a corporation in New Jersey and New York.
Initial Steps to Close Your NJ or NY Corporation
The first step to dissolving any corporation is to conduct a shareholder vote or other procedure outlined in your articles of incorporation or corporate by-laws. The process should be recorded in writing, such as a formal resolution.
The next step is to settle the corporation's business affairs, which may include:
- Liquidating your assets
- Terminating your lease and/or selling your commercial property
- Cancelling existing contracts
- Paying outstanding liabilities
- Distributing remaining assets to shareholders
- Notifying customers, employees, vendors, and other business partners that you plan to close your corporation
You can find a more detailed discussion of these steps here. Once you wind up the business, you can move on to the paperwork part of the process.
The Corporate Formalities of Closing Your Company
Each state has its own process for dissolving a corporation. The process is designed to not only ensure that creditors are put on notice that the corporation can no longer incur business debts, but also to protect business owners from incurring any future legal liability. Most states provide the necessary forms on their websites, under the names application of withdrawal, certificate of termination of existence, termination of registration, or certificate of surrender of right to transact business.
How to Dissolve a Corporation in New Jersey
The New Jersey Department of the Treasury requires corporations to follow specific steps and submit proper documentation when dissolving a New Jersey corporation. Every corporation subject to the New Jersey Corporation Business Tax Act must also submit tax returns, regardless of whether it has discontinued business or distributed assets in liquidation. In addition, corporations remain subject to at least the annual minimum tax of $500 until legally dissolved.
While dissolving a New Jersey for-profit corporation requires a number of forms, the process can largely be completed online. The exception is the tax clearance certificate, which must be provided by Division of Taxation.
As detailed by the NJ Department of the Treasury, the forms and payments to be submitted for dissolution are:
- Certificate of Dissolution: The type of form required depends on whether the corporation is dissolved without a meeting of the shareholders (Form C-159D) or pursuant to action by the board and with a meeting of the shareholders (Form C-159S)
- Estimated Summary Tax Return (A-5052-TC), with a separate payment for any taxes due
- Request for Tax Clearance Certificate (Form A-5088-TC)
- Payment of all fees: $120.00. This includes the $95.00 dissolution fee and the $25.00 tax clearance certificate application fee. Payment may be made by either check or credit card.
The dissolution is considered effective as of the date the Division of Revenue receives the properly completed and executed articles of dissolution, payment of all fees, and notice of Tax Clearance from the Division of Taxation. All business tax liabilities for the corporation will terminate as of the date the request for dissolution is received and accepted by the Division of Revenue.
How to Dissolve a Corporation in New York
If your business is located in New York, the process is fairly similar. Here's what you need to know about how to dissolve a corporation in New York:
- Obtain consent from the Department of Taxation and Finance: You must formally agree to dissolve your corporation. Then prepare a final tax return for the state. If returns and taxes are current, the Tax Department will issue written consent. If issues exist, you'll receive a letter outlining required resolution steps. Create and file a Certificate of Dissolution with the Department of State: Complete a Certificate of Dissolution form from the Department of State website. Include the corporation's official name and incorporation date. List each officer/director's name and address. Explain how the dissolution was authorized. Attach a copy of Consent from the NYC Commissioner of Finance. Filing costs $60. Submit via mail, fax, or in person.
Tax Implications of Dissolving a Business
Dissolving a business can have a wide range of tax implications, including capital gains tax business sale or liquidation. For instance, when dissolving a corporation, many businesses sell their assets, whether it is product inventory or real property used in the business. Each asset is treated as being sold separately for determining the treatment of gain or loss.
At the corporate level, the taxable gain or loss is the sale proceeds minus the adjusted basis of the assets. Once the corporation distributes the remaining cash to the shareholders, a taxable gain or loss is also applied at the shareholder-level.
Upon dissolution, corporations must file a final federal tax return. They must also report capital gains and losses on Schedule D. If you have employees, you must pay them any final wages owed. You must also make final federal tax deposits. Additionally, you need to report all employment taxes.
Importance of Following the Proper Steps to Dissolve Your Corporation
As discussed above, there are several key legal steps that a corporation must take to legally dissolve. Simply closing your doors and walking away is not an option, as it can result in significant liability. For instance, if a corporation is not formally dissolved, third parties may continue to bring legal claims as though the business is still operational. Additionally, New York and New Jersey corporations continue to incur tax obligations until they are formally dissolved.
Unpaid tax liabilities can also lead to personal liability for corporate executives. Under New Jersey law, officers and directors can be personally liable in specific situations. This applies when they distribute assets before paying all corporation taxes. Those taxes include franchise taxes, fees, penalties, and interest. The personal liability covers all these unpaid amounts.
Seek the Guidance of an Experienced NJ or NY Business Attorney
Corporate dissolution can be complex. Many businesses seek help from experienced professionals like accountants, tax advisors, and corporate attorneys. Partnering with knowledgeable professionals helps complete all required steps. This ensures the corporation is officially dissolved. It also helps avoid any unexpected future liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
