The Mistake of a Business Owner in Not Formally Dissolving their Business

Hypothetical: Amanda owns Amanda’s Cleaning Products, Inc. Her business makes and distributes different cleaning products. As common for most businesses, she had to go into debt in order to start manufacturing her products. She took out credit cards in her business name, and a couple of personal loans from friends and family. One year after opening her business, Amanda decides that being a business owner is not for her. So, she meets with her accountant who tells her to simply file a final tax return, and to not worry about dissolving her business because she had only been in business for a year and she was going to pay off all of the debt. One year later, Amanda’s Cleaning Products, Inc. receives a lawsuit from Company A claiming that Amanda misappropriated her cleaning products from Company A and is suing for significant damages.  Amanda goes and meets with a business attorney.

The business attorney explains to Amanda that had she formally dissolved her company, the claim by Company A would have likely been barred (in other words dismissed against Amanda’s Cleaning Products, Inc.). Since Amanda did not formally dissolve her corporation, her corporation is “alive” and creditors can commence lawsuits against it even though she is no longer actively involved in her corporation. In addition, because Amanda had not used a business attorney (since she unfortunately believed that all she had to do was file a piece of paper with the Minnesota Secretary of State), her corporation is not properly formed, and there is a significant probability that Company A will ask the court to pierce the corporate veil. Piercing the corporate veil, if successful, will mean that Amanda’s personal assets will be available to be seized to pay any judgment against the business.

Because Amanda took advice from her accountant – which was neither proper nor accurate – Amanda now will most likely have to spend tens of thousands of dollars defending a lawsuit that could have been avoided if she had sought the advice of a business attorney.

Properly dissolving a corporation is generally best practice. Once the corporation is properly dissolved, the corporation (and its shareholders potentially) can be immune from lawsuits. That is because one cannot sue a corporation that no longer exists (unless there is fraud).

Spangler and de Stefano, PLLP assists business owners with most aspects related to their business, including the proper dissolution of a business.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice or tax advice and should not be construed as legal or tax advice advice.